Karen Petrou: Inflation’s High Cost to Competition and Comity

2023-04-24T15:18:29-04:00January 18th, 2022|The Vault|

It’s not news that the latest inflation data are disastrous.  Even if they won’t last, as Mr. Powell again assured Congress, it sure is hard to see how the combination of pressures detailed in the inflation data lead to ta rate even close to the FOMC’s median projection for 2022 of 2.6 percent.  This means that real rates will remain negative throughout 2022 and well into 2023.  Indeed, given that the FOMC’s median projection for the near-term fed funds rate never gets above 2.1 percent, even the Fed has tacitly conceded that negative real rates may well be  prolonged absent either divine intervention or another devilishly-deep recession.  In June of last year, I predicted that U.S. inflation would not prove transitory and forecast the political impact finally understood at the highest levels of the Biden White House.  Much is also now being written about the inequality impact I described last year, but little is said about the sum total impact of these sorry facts of life on the financial system.  These may also prove anything but transitory.

The first financial-system impact of high inflation and slow growth for anything but the S&P is both political and structural.  With his back increasingly pushed to the wall by inflation’s toxic equality impact, Mr. Biden defended himself against the latest CPI numbers by arguing that many of them are due to monopolistic price controls best cured by rapid antitrust initiatives such as the one already launched against the meat industry.

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