Back in April I wrote a blog article about Inflation (see Inflation) that gave some examples of how inflation can occur.
Since then, we haven’t seen significant changes in inflation – it’s still running over 8%. Fortunately, gasoline prices have dropped quite a bit and that’s helping to drop the energy component of the Consumer Price Index (CPI), thereby causing the overall rate to moderate somewhat. Unfortunately, economists believe this moderation may only be temporary. (Note: I wrote this story prior to the release of August’s 8.3% CPI on Tuesday 9/13/2022 which was followed by a historic drop in the stock market.)
But I think the other shoe (unemployment) may drop shortly.
Congress created The U.S. Federal Reserve (the “Fed”) to manage the country’s economy through economic policy and it is tasked with five responsibilities. But the Fed’s primary, and original, responsibility is to “conduct the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.”
Unfortunately for the Fed, these three goals are at odds with one-another. Changes in each will affect the other two goals.
In the short-term, creating stable prices can be achieved, but at the risk of increasing interest rates and/or unemployment. Want lower interest rates? Inflation will increase. Sometimes these components can take a long time to correct.
Looking at recent history, what have we seen? The Fed has been raising interest rates.
So, the Fed has been raising interest rates. That will have a depressing effect on our economy, probably to negatively impact employment. Want proof? Here are some recent headlines:
Alarm Bells Sound As World's Second Largest Appliance Company Reports Demand Plunge
"Production Has Fallen Off A Cliff" - Goldman Reportedly Prepping For Layoffs
What caught my attention was the Wall Street Journal opinion piece “Inflation and the Scariest Economics Paper of 2022.” The article was based on the paper “Understanding US inflation during the COVID era” published by The Brookings Institute.
Essentially, the paper states that in order to get back to 2% inflation1, which is the Fed’s long-term target rate, interest rates will need to rise and that will equate an unemployment rate of 6.5%, based upon current employment data when input to their economic model:
This perfectly illustrates the conundrum facing The Fed.
The model gets scarier when you incorporate a naturally-occurring increase in the labor force, thereby resulting in a much higher rate of unemployment:
The Fed is caught between a rock and a hard place in trying to calm our current economic woes:
Suffer high inflation but low unemployment, or;
Suffer high unemployment with low inflation.
Either way, we suffer.
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So, what does this mean for us?
If you’re still working you may want to be a bit more conservative in your spending and saving. Maybe pay down some debt. Your job might be one of those sacrificed for stable prices.
If you’re retired, you may also want to become more conservative in saving and spending, but also be prepared for some rocky days in the stock market.
Regardless of your employment status, you may want to re-read some suggestions in my article PANIC?!?!?!?!.
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“May the stars carry your sadness away.
May the flowers fill your heart with beauty.
May hope forever wipe away your tears.
And above all, may silence make you strong.”
- Chief Dan George, chief of the Tsleil-Waututh Nation and actor
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“I’d like a pepperoni pizza with extra cheese and a side of blood and sweat.”
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Even at 2% inflation, prices will double every 36 years, based on The Rule of 72.
Informative, but what to do about it all ?
I'm lucky to have you as my financial advisor ❤