(July 12) Today’s report on inflation further confirms my assessment, written here in May, that the Federal Reserve Board should keep intact its pause on interest-rate hikes.

The Consumer Price Index rose just two-tenths of a percent in the past month, which is a 2.4% annualized rate. Prices for the 12 months through June rose 3%. This is the twelfth consecutive month that the rate of price hikes has slowed. Both numbers are only a fraction above the Fed’s preferred target of a rate below 2%.

Meanwhile, the glut of available jobs has disappeared. After several years in which employers had extreme difficulty finding enough workers for their needs, CBS reported this morning that there are now many more job seekers than job openings. Meanwhile, household savings rates, which grew substantially during the pandemic, now have fallen precipitously. This means that families have less “ready money” to spend than they did 18 months ago when inflation was raging.

Demand for goods and services is therefore almost certain not to rise, and if anything is poised to fall. When demand falls, price inflation can’t rise. That’s an iron law of economics. The law is exacerbated when the economy also is being slowed by massive regulatory efforts and bureaucratic growth, as is the case under the Biden administration. A slowing economy is far less likely to catalyze high inflation. (But not impossible: See the Jimmy Carter era.)

Interest rates set by the Federal Reserve are nowhere near historic highs now, but they are near the highest they have been in 30 years. The financial markets have internalized three decades of a rate scale in which a 5% Federal Funds rate is considered high. Continued increases above that rate would amount to at least somewhat of a shock to the financial system. And with inflation falling rather than rising, there’s no need even to consider such a shock….. [The full column is here.]


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