The best that can be said of today’s Federal Reserve meeting is that the Fed is no longer in total inflation denial. However, it certainly cannot be said that the Fed has taken policy action to address its present twin challenge of rising inflation and emerging asset price bubbles. This raises the chances that we will have a hard economic landing next year.
It would be an understatement to say that the Fed has been blindsided by inflation’s recent rapid pickup. At the start of the year, the Fed assured us that inflation would be only marginally above its 2 percent inflation target. In the event, over the past twelve months, consumer price inflation has risen to 5 percent or to its highest level in the past 12 years. Meanwhile, producer price inflation has accelerated to around 6 ½ percent suggesting that considerable inflationary pressure remains in the pipeline.
More disturbing yet is the recent sharp acceleration in inflation. As measured by the Personal Consumer Expenditure Deflator, excluding energy and food prices, which is the Fed’s favored inflation measure, over the past three months inflation has been running at an annualized 7 percent rate. At the same time, wages appear to have been increasing at their fastest pace since the 1990s.
The Fed also appears to have been blindsided by the asset price inflation to which its ultra-easy monetary policy has given rise. It did not anticipate that house prices would be increasing today by 12 percent a year, or at their fastest pace since 2006. Nor did it anticipate that equity valuations would rise to more than double their long-term average or to a level that has been experienced only once before in the last hundred years.
- General Motors expects the ongoing semiconductor chip shortage and rising inflation to increase its expenses during the second half of the year by up to $3 billion
- The increased costs include a greater-than-expected impact from the parts shortage during the third quarter as well as rising inflation costs of between $1.5 billion and $2 billion.
- For the year, GM has said it expects pretax profits “at the higher end” of a $10 billion to $11 billion range.