Xinhua News Agency, Washington, April 12.(International Observation) Policy Miscalculation, Inflation Out of Control
Xinhua News Agency reporter Xiong Maoling Xu Yuan climbed high
According to data released by the U.S. Department of Labor on the 12th, the U.S. consumer price index (CPI) rose by 8.5% year-on-year in March this year, a new peak in more than 40 years. Economists believe that in the context of still supply chain bottlenecks, tight labor market supply, and ongoing conflict between Russia and Ukraine, the high inflation situation in the United States is difficult to improve in the short term. U.S. policymakers have insufficient pre-judgment of inflation and missteps in dealing with it, and may be forced to adopt aggressive interest rate hike strategies in the future, which will not only increase the risk of the U.S. economy falling into recession, but will also plant hidden dangers for the world economy.
Inflation “fever” is hard to subside
According to data from the U.S. Department of Labor, under the influence of factors such as the continued supply chain bottleneck caused by the epidemic and the recovery of consumer demand, U.S. inflation began to accelerate about a year ago, and the year-on-year CPI growth rate has been higher than 6% for six consecutive months. Compared with February this year, the month-on-month and year-on-year increases in the U.S. CPI increased significantly in March, especially in energy, housing costs and food prices.
In March, U.S. energy prices rose 32% year-on-year, with gasoline prices soaring 48% year-on-year. Food prices rose 8.8% year-on-year. The cost of living, which accounts for about one-third of the CPI, rose 5% year-on-year.
Inflation has spread from goods to services, causing widespread price pressures. Diane Swank, chief economist at Grant Thornton in Chicago, pointed out that the prices of big-ticket items, including new cars, furniture and sporting goods, continued to rise; in the service sector, airfare and rental car prices rose more than 20 percent from a year earlier. %, hotel room prices rose more than 30% from a year earlier.
Wells Fargo Securities economists Sarah Howes and Michael Presser believe inflation has a long way to go before falling back to the Fed’s 2 percent target.
Wells Fargo Securities predicts that the U.S. CPI in the fourth quarter of this year will still rise by about 6% from a year earlier. The Fed’s economic outlook forecast released in mid-March also showed that U.S. inflation may rise to 4.3% this year.
Policy missteps are the cause
In response to the impact of the epidemic, the Federal Reserve began to implement an “uncapped” quantitative easing policy in early 2020, injecting a large amount of liquidity into the market. Ray Dalio, the founder of Bridgewater Fund, the world‘s largest hedge fund, pointed out that the economic recession under the epidemic has prompted the central bank to increase the supply of money and credit on a large scale.
Although some economists warned of inflation risks early on, policymakers including the Federal Reserve and the Biden administration’s economic advisory team have always adhered to the “inflation temporary theory” and maintained the quantitative easing policy until high inflation became a big problem.
Protectionist policies adopted by the White House have also exposed American businesses and consumers to higher costs of imported goods. Gary Huffbauer, a senior researcher at the Peterson Institute for International Economics, a U.S. think tank, said in a report that if the U.S. reduces tariffs on imported goods, the CPI can drop by about 1.3 percentage points at one time.
After the outbreak of the Russia-Ukraine conflict, the unilateral sanctions against Russia initiated by the United States to win over its allies had a huge impact on the global energy, finance, food, industrial chain and other aspects. The entire international community, including the United States itself, had to pay for it.
Federal Reserve interim chairman Jerome Powell said the U.S. inflation outlook this year had deteriorated significantly before the conflict between Russia and Ukraine. One reason for the larger and longer-lasting rise in inflation than is widely expected is an underestimation of the severity and persistence of supply chain bottlenecks. The Russian-Ukrainian conflict and related sanctions could also further disrupt supply chains.
“Bill of war” to bury hidden dangers
Powell said that the current U.S. inflation is too high, and facing the uncertainty caused by the conflict between Russia and Ukraine, the Fed will take a one-time interest rate hike of more than 25 basis points if necessary to reduce the inflation level. Several Fed officials later said they were open to the Fed raising interest rates to 50 basis points.
The minutes of the Fed’s March monetary policy meeting released last week showed that Fed officials believe that several 50 basis points of interest rate hikes may be needed, and to start shrinking its balance sheet by as much as $95 billion a month as early as May, more than in 2017. The process of reducing the balance sheet to 2019 has accelerated significantly.
Judging from historical experience, in the context of high inflation and low unemployment, it is difficult for the Federal Reserve to achieve a soft landing of the economy by sharply tightening monetary policy. Aggressive monetary policy may hurt itself and bring disaster to the world.
Desmond Rahman, an economist at the American Enterprise Institute, believes that if the Federal Reserve raises interest rates sharply to puncture the bubbles in the U.S. stock market, housing market and credit market, it may trigger a deep economic recession. Former U.S. Treasury Secretary Summers recently pointed out that in the past few decades, the U.S. economy will fall into recession within two years when inflation is above 4% and unemployment is below 4%.
The Fed’s start of an interest rate hike cycle is bringing greater volatility risks to the world economy, which may lead to an increase in the risk of global debt defaults.
Due to the sharp decline in foreign exchange reserves, the Sri Lankan currency rupee has continuously depreciated sharply in the past month or so. The Sri Lankan government decided to temporarily suspend the repayment of all foreign debts on the 12th. In Latin America, the Central Bank of Argentina has raised interest rates three times this year to stabilize the local currency exchange rate. Argentine economists are worried that the Fed’s interest rate hike will increase the cost of Argentina’s repayment of US dollar debt and increase the risk of national debt.
The International Monetary Fund warned at the beginning of this year that faster tightening of monetary policy by the Federal Reserve could lead to capital outflows and currency depreciation from emerging economies, making economic growth prospects more uncertain.
[Editor in charge: Tu Tian]