The economy is still inflated
Subscribe to enjoy similar stories. The Federal Reserve has slowed inflation, but many Americans continue to pay a high price for the cumulative inflationary consequences of excessive monetary and fiscal stimulus. We wrote in these pages in February 2021 that, based on history, high deficits combined with expansive monetary policy would trigger accelerating inflation.
Joe Biden’s $1.9 trillion American Rescue Plan was close to being enacted, but we never imagined that the Fed would maintain zero interest rates and continue its massive purchases of assets until March 2022, almost a year after inflation first began to surge. Today’s economy is still suffering from these policy excesses. There’s a big difference between the rate of inflation, which measures the percentage change in the prices of all goods and services, and the actual price level consumers currently pay, which is the accumulation of past inflation.
The Fed focuses its attention on achieving its dual mandate of 2% inflation and maximum employment. Meanwhile, it has no strategy to address the fact that the compounding of past inflation has raised consumer prices dramatically: The consumer-price index is about 22% higher than its pre-pandemic level. This is higher than the 19% rise in the Fed’s favored personal-consumption-expenditure price index, but the latter measure understates the increases in consumers’ out-of-pocket expenses by including items financed by third-party payers, such as Medicare, Medicaid and employer-provided health insurance.
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