The consumer price index is up 2.5% over the past 12 months, the highest inflation rate in four years.
Buffeted by slow growth and too few decent paying jobs, Americans now have to deal with more inflation.
In January, consumer prices rose 0.6%. Although that was driven by a surge in energy prices not likely to repeat, core inflation — prices less food and energy — has been greater than the Fed’s target of 2% for the last year.
Yet, economic growth is not likely to accelerate enough to support wages that rise as fast as prices going forward.
Donald Trump’s promised tax cuts and reforms, infrastructure and deregulation initiatives are likely to face a host of obstacles. Those include congressional Republican opposition to further increasing the budget deficit, opposition from adversely affected parties like Wal-Mart and other retailers regarding border tax adjustments, and legal challenges to executive orders — for example, easing labor market and financial regulations.
America's 75 million baby boomers have piled up more debt while holding less savings than generations before them, a mix that is crimping their hopes of a comfortable retirement.
The Federal Reserve will be faced with an uncomfortable choice — raise rates too quickly to combat inflation or continue printing more money in hopes of further supporting economic growth.
Here are four things to know about higher inflation.
1. More Money Won’t Boost Growth
Much of what caused the financial crisis and slow growth has not been fixed. Big banks are still too big to fail and without a structural solution — namely breaking up the largest institutions and reinstating Glass-Steagall — deregulation or simply lax enforcement of existing rules by former Wall Street executives, who made fortunes making deals and trading, poses new risks.
Subsidized Chinese products are still flooding U.S. markets, destroying good-paying manufacturing jobs, and Trump is backing off his campaign promise to directly challenge Chinese protectionism.
Similarly, oil prices are up enough to soon increase U.S. shale production to 2015 levels — drilling activity has risen significantly since May. However, Trump will face considerable political opposition and years of legal challenges if he tries to boost drilling activity in the Gulf and elsewhere offshore. That will leave the United States dependent on imported oil, and send consumer dollars abroad instead of creating jobs here.
Absent fixes for those problems — and promised tax cuts — the Fed going slow on interest-rate increases will enable more inflation but won’t do much to boost growth.
2. Easy Money and High Inflation Steals from the Elderly
Easy money pushes down rates on CDs where many retired Americans park savings to supplement Social Security and pensions.
Even with the Federal Reserve pushing up the fed funds rate 0.5 to 0.75 percentage points this year, the rush of foreign capital into U.S. markets will likely keep long rates low, as it did when Ben Bernanke pushed up short rates in 2004-2006.
Hence short-term CDs will pay a bit more than in recent years but rates on 5- and 10-year deposits are not likely to increase much — none will likely rise enough to compensate for higher inflation.
3. Federal Policies Make Too Much Inflation Certain
Many households have only one practical source for high-speed Internet and cable TV, but the government does not regulate cable companies as it does electric utilities. Rates have risen rapidly in recent years.
Health-care inflation is not likely to abate whether Obamacare stays in place, or the Republican Party successfully replaces it with other forms of subsidies to purchase insurance.
Top private universities and a few elite public institutions have a lock on most good-paying jobs for graduates. Those schools have boosted tuition far more rapidly than even health-care costs. That sets the pace for other schools, and the Trump team is not likely to intervene in their monopoly pricing.
Federal policies permit prescription-drug manufacturers to charge much higher prices than in Europe but don’t permit consumers to legally import drugs and force competition. Here we may see some presidential leadership for reform but progress will be slow.
4. A Higher Minimum Wage Will Only Make Matters Worse
When President Barack Obama proposed a $10.10 minimum wage in 2014, the Congressional Budget Office estimated that would destroy about 500,000 jobs. Now absent any change in the federal wage floor, many states have gone into business for themselves — some mandating even more aggressive pay increases.
Some restaurants and other labor-intensive establishments will shutter, but most will find better ways to use smart machines and save labor.
Although those holding minimum-wage jobs will earn more, all those extra unemployed workers will push down wages of workers earning near the minimum. Floor managers at fast-food restaurants will have fewer people to supervise but end up accepting barely above new minimum wages to work.