Once Dismissive Of Inflation, Fed Chair Draws Lessons About Economy From the 1970s
September 13, 2022–One might guess that a fraction of a number like 0.1 would have little impact on the global economy. But that guess would be wrong. Today, the U.S. markets took a nose dive, and it was a fall unlike any other since June 2020. The S&P 500 fell 4.3 percent, while the tech-heavy NASDAQ fell 5.16 percent. It all came in response to inflation figures for August, and that’s where the figure 0.1 matters.
Inflation Holding Strong
Economists had expected the inflation figure to drop by 0.1 percent for August. Instead, it rose by 0.1 percent. That means all items the Bureau of Labor Statistics tracks rose 8.3 percent for the year. According to the BLS release, food, shelter, and medical expenses rose the most. The cost of new vehicles also went up, 0.8 percent for the month and 10 percent for the year.
The rise in prices might have taken some economists by surprise because energy prices have fallen. Gas prices dropped by 10.6 percent or the month, and the energy index declined by 5 percent. That’s a reversal from spikes near 24 percent for the year.
Central Banks Continue to Raise Rates
Central banks in the United States and the European Union are promising to continue raising federal interest rates. Last week, the European Central Bank raised its three key interest rates by 0.75 percent. The U.S. Federal Reserve is poised to announce a similar decision, if not a full percentage point, when its board meets September 20-21.
After once saying globalization had protected the U.S. economy from the risk of inflation, Fed Chair Jerome Powell has changed his tune.
Just over a year ago, Powell told CBS Scott Pelley that the nature of the globalized economy meant inflation is not a factor.
“In addition though, the economy has changed because the globalization of the economy and technology have enabled manufacturing to take place all around the world. It’s very hard for people in wealthy countries to raise prices or to raise wages. It’s hard for workers to raise wages when wages can move overseas. So it’s just a different economy. And one manifestation of it, if you look around the world in other wealthy countries, they’re all experiencing very low inflation and really have for the last quarter of a century.”
CBS 60 Minutes, April 11, 2021
Now, Powell is looking back to lessons from the 1970s and 1980s about inflation dynamics.
“The first lesson is that central banks can and should take responsibility for delivering low and stable inflation,” Powell said on August 26, adding that “it may seem strange now that central bankers and others once needed convincing on these two fronts.”
Jackson Hole speech, August 26, 2022
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