If you think you spent more last month on goods and services, you’re right. U.S. consumer prices spiked a lot faster than expected in June and some experts are warning inflation could trap Americans in a financial hole, or as one economist put it, “a slow-motion train wreck.”
Consumer prices in June increased 0.9 percent from May and 5.4 percent over the past year, the U.S. Labor Department reported on July 13. This marks the highest 12-month inflation spike since August 2008.
This spike proves that a swift rebound in spending has collided with widespread supply shortages. With fewer products available, consumers are being charged higher prices, according to AP.
If the trend continues, Americans will be faced with high inflation. The Federal Reserve could be forced to raise rates to slow and stop inflation. According to the Fed, higher inflation is only a temporary and transitory situation as the US. economy rebounds from the covid-19 pandemic crisis.
Some are calling on the Fed to take action and slow inflation, however, the Fed insists the spike will go away when supplies catch up with demand. But what if the Fed is wrong? If it raises rates, making debt and borrowing more expensive, the stock market could crash. Inflation would also negatively impact the value of future cash profits of big business, some experts worry.
The situation heated up a debate at the Federal Reserve between the Biden administration and Congressional Republicans over how long prices will continue to increase, AP reported.
The Fed and the White House maintain that the current bout of inflation will prove temporary. Some economists and Wall Street investors agree. Others worry that continued higher inflation could lead the Fed to act earlier than expected to pull back on its low interest rate policies. If this happens, it could weaken the economy and derail the recovery.
Some experts say the warning signs of a derailment are already here.
“Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years,” wrote Nouriel Roubini, chairman of Roubini Macro Associates, in a column for Project Syndicate. Roubini was a senior economist for international affairs in the White House Council of Economic Advisers during the Clinton administration.
He continued, “For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies (SPACs), the crypto sector, high-yield corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway retail day trading.”
The U.S. economic woes can’t be blamed totally on the pandemic and shutdown. According to Roubini, the Fed has been in a debt trap at least since December 2018, “when a stock- and credit-market crash forced it to reverse its policy tightening a full year before covid-19 struck. With inflation rising and stagflationary shocks looming, it is now even more ensnared.”
And because of this, Roubini said, the economy’s “slow-motion train wreck looks unavoidable.”
Dario Perkins @darioperkins weighed in on the transitory vs longer-term-inflation debate on Twitter. “I’m still on Team Transitory. These prints are a little higher than I would like, but they do not yet challenge the basic thesis (esp given the strong COVIDy feel to the data still). We need to see the MoM 9Month-over-month) rates begin to dip soon though…”
But economist Daniel Lacalle @dlacalle_IA seemed concerned. He tweeted, “United States. Big rise in inflation in the first month without ‘base effect”. Almost all items rising fast, with shelter, energy, used vehicles, and utilities as most concerning.”
Washington Post economics correspondent Heather Long @byHeatherLong tweeted a list of items driving up inflation. They include car rentals, used car sales, laundry machines, airfare, and hotels, among others.
Consumer prices for used cars and trucks jumped 10.5 percent from the previous month, driving one-third of the rise in the overall index, the Fed said. Supply shortages and higher shipping costs added to the rapid increase in goods inflation, The Wall Street Journal reported. Airfares went up 2.7 percent last month, and have jumped nearly 25 percent compared with a year ago, AP reported.
While consumer prices increased, wage gains lagged behind. Average hourly earnings increased 3.6 percent in June compared with a year ago. Normally, this would be a “solid gain, but far less than current inflation,” AP reported.
Rising food prices hit lower-income workers the hardest.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?
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