James Freeman:

Inflation is surging as Washington prints and spends money at historic levels. Meanwhile Covid-related policies are still making it hard for businesses to staff up and increase production. A former Trump economic adviser isn’t the only one concerned that too much money chasing too few goods may be more than a temporary problem.

The former Trump adviser, Kevin Hassett, served as chairman of the White House Council of Economic Advisers. Now he’s outside government and watching the feds shovel cash to consumers while making life more difficult for producers. Today Mr. Hassett writes via email that “the Biden Administration is providing the biggest positive stimulus to demand since WWII, and at the same time doing everything it can to suppress supply. Higher [unemployment insurance] benefits, closed schools (which keep one parent at home), and promised corporate tax hikes practically guarantee that supply can not keep up with demand. It is a recipe for an inflation shock we have not seen in the U.S. in a generation.”

It’s not just the Biden administration’s reckless fiscal policy at issue. On the monetary side of the Beltway swamp, the Federal Reserve continues to maintain emergency easy-money policies even though the U.S. economy has been rebounding since last summer. And all of the money the Fed has created is not just showing up in markets for virtual coins and actual beach houses. Some Fed officials have dismissed general inflation as merely “transitory” following the pandemic. The Journal’s Gwynn Guilford reports today:

Consumer prices surged in April by the most in any 12-month period since 2008 as the recovery picked up, reflecting both rising demand as the Covid-19 pandemic eases and supply bottlenecks.

The Labor Department reported its consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% for the year ended in March. Consumer prices increased a seasonally adjusted 0.8% in April from March…

U.S. stocks fell and government bond yields rose after the inflation data was released. Investors are concerned that rising prices could prompt the Federal Reserve to move on interest rates sooner than expected.

This column has been surprised that America’s asset managers have not reacted more aggressively in response to the inflation threat. Perhaps it is because so many of the people who run money are too young to remember the inflation of the 1970s or have only vague childhood memories of their parents’ anguished discussions on the topic. But if bond investors demand higher yields, consumers feel the pain when they borrow at higher interest rates. If both investors and consumers come to expect higher prices in the future, the problem will not be transitory.

Richard Fisher does remember the 1970s. As a young economist he joined the Carter Treasury Department while inflation was raging. More recently he spent a decade running the Federal Reserve Bank of Dallas. He’s undeclared on the question of whether the current inflation spike is transitory or not and says “we’re in a tug-of-war” between big near-term price pressures and long-run inflation expectations. “I hope the Fed is right,” he says in a Wednesday phone call.

Mr. Fisher respects his former Fed colleagues while also noting the “risk they are running” in waiting before taking measures to fight inflation—like raising interest rates or shrinking the Federal Reserve’s balance sheet to drain cash out of the financial system. He notes that it takes time for Fed policy changes to “work their way into the real economy” and so by the time Fed officials recognize a problem it’s possible that producers and consumers will already expect long-term inflation, which in itself can create more than a temporary problem. He also noted the challenges for businesses that now must make investment decisions in an environment of rising costs for raw materials.

Maybe some Fed officials are beginning to appreciate the risks they’ve been running. Now the Journal’s Paul Kiernan reports from Washington:

A top Federal Reserve official said on Wednesday he was surprised by a larger-than-expected jump in inflation last month, but stressed that more data would be necessary for the central bank to begin scaling back its easy-money policies.

“I was surprised,” Richard Clarida, the Fed’s vice chairman, said of the 4.2% increase in consumer prices in April from a year earlier. “This number was well above what I and outside forecasters expected.”

Perhaps Mr. Clarida and his Fed colleagues will consider the idea that they’ve already created enough money.

Much of the easy-money crowd wants the Fed to run loose until unemployment falls much further. But increased unemployment benefits that discourage work are not the only reason the money-printers may not get the job creation they want in return for the inflation they’ll tolerate. Research from San Francisco Fed economist Marianna Kudlyak and Stanford’s Robert Hall suggests that Washington’s ability to manage the speed of hiring within a recovery is limited:

A remarkable fact about the historical US business cycle is that, after unemployment reached its peak in a recession, and a recovery begins, the annual reduction in the unemployment rate is stable at around one tenth of the current level of unemployment. For example, when the unemployment rate was 7 percent at the beginning of a year, the unemployment rate fell by 0.7 percentage points during the year. The economy seems to have an irresistible force toward restoring full employment.

As for the forces who run the Fed, let’s hope that their current inclination not to act against inflation won’t create irresistible problems for the rest of us.

“The Fed has to be hoping that their nonchalance is reassuring rather than destabilizing for inflation expectations. I hope they’re right,” says former Richmond Fed President Jeff Lacker.

During the 1970s inflation helped end the presidencies of Gerald Ford (whose “Whip Inflation Now” campaign didn’t stop the 5.76 percent inflation rate) and Jimmy Carter. Carter seized on economist Arthur Okun’s “misery index” to criticize Ford’s economy, when the sum of the inflation rate and the unemployment rate (which should be the U6 number instead of the popularly quoted unemployment rate) was 12.7. By June 1980, Carter’s misery index was 21.98. (Which is why Ronald Reagan defined a recession as when your neighbor loses his job, a depression as when you lose your job, and a recovery as when Carter loses his job.)

By the way, the misery index as of April is 15.03.




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