September 14, 2022

The persistent US inflation rate that appears to have caught by surprise the Administration. Equally important if the fact that the persistent inflation also debunks the view touted by the Administration about the so-called Putin price hike and rising oil price inflation theory. US gasoline prices have declined for 12 consecutive weeks, the longer streak since 2018. Oil prices have also fallen during that time and yet the inflation rate remains high. So much for that inflation theory. We have argued that inflation is a monetary phenomenon. That we need to focus on the monetary aggregates in relation to the real GDP growth rate in order to get a handle on the inflation rate. Since the Fed plays a great role in the determination of the money supply, it follows that the Fed has an outsized role to play. As of late Mr. Powell has shown a great deal of resolve. The Fed has announced a two-pronged approach to fight the US inflation rate. One being a reduction of its balance sheet, and the other being a tightening affected through increases in the fed fund rates. Our analysis suggests that the initial effect of the balance sheet reduction on the inflation rate will be muted, but as time goes on and the excess reserves are extinguished the impact of the fed’s balance sheet reduction on the monetary aggregates and the inflation rate will steadily increase. Based on this we suspect that the fed will act aggressively both this month as well as during the November meeting and that to tame the inflation rate it will take longer that the monetarists or the fed model predicts.

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