In the top figure the graph line is rising. Perhaps it is because the economists at the Fed have been learning how to protect the nation's industry better.
If I understood your post correctly, tariff-driven inflation is bad because it increases costs for consumers and businesses without boosting economic growth or corporate earnings.
The next question is whether the Federal Reserve would reduce interest rates to offset this inflation. If they don’t, inflation could rise significantly higher. However, we might still be in a recession even with an interest rate reduction.
What tools would the Federal Reserve have to pull the economy out of such a recession? If the tariff situation lasts only a few months, it may or may not result in a mild recession. However, if tariffs continue for the rest of the year or beyond, then we may see a recession, which could deepen depending on who continues to be a target of tariffs and how those countries retaliate.
The administration might push for interest rate cuts even before a mild recession occurs, especially if inflation rises above 3%, to argue that tariffs benefit the country. Falling gas prices could provide some relief and are already used by certain parts of the media as a benefit of tariffs, as they indirectly help both consumers and businesses, but it may not be enough to offset the broader inflationary pressures caused by tariffs.
Effectively, tariffs provide a stagflationary impulse that forces the Fed to either fight inflation with higher interest rates (and thus make the recession worse) or hope that inflation doesn't become entrenched when it cuts interest rates to boost the economy. It is the identical situation as the Fed was in in 2022 when oil and natural gas prices skyrocketed and global supply chains were disrupted due to China's Covid lockdowns. Guess what? The tariffs will disrupt global supply chains and, in particular, Chinese supplies in a way that makes the pandemic look like child's play.
I don't buy into the argument of so many pundits that the Fed's next move is to accelerate rare cuts to boost the economy. That is the same mistake the Fed made in the 1970s when it bowed to pressure from the White House and the public to cut interest rates to keep unemployment rates low. The result was inflation that got increasingly out of control until Paul Volcker had to induce a double-dip recession with massive rate hikes in the early 1980s.
In 2022, the Fed managed its response much better and ensured it first got inflation under control before addressing a slowdown in the economy. However, with the current occupant of the White House, I fear the pressure on the Fed to cut rates would be immense, with potentially very harmful long-term consequences.
The Fed's problem is that it has only one tool (interest rates and the ability to influence the government bond yield curve), and that one instrument cannot serve two masters at the same time. That is one of the reasons why tariffs are so terrible for the US. Donald Trump has made Americans much poorer in the short and long term.
I'm concerned that the inflation we saw in 2022 could seem insignificant compared to what lies ahead if the current administration continues to undermine democracy and dismantle government bureaucracy from within. If this trend continues, the consequences could go far beyond economic instability. Eroding public trust in institutions, weakening accountability, and deepening societal divisions could have profound long-term impacts. The damage to our institutions and democratic norms may take decades to repair, leaving lasting scars on the country. The question is, can we do it? Only time will tell.
Suppose I buy an apartment building in 2009 for $1 million. In 2022, after many years of QE and ZIRP, and no real economic growth, the building is worth $2 million. This is asset inflation. At some point, the rents have to increase (which is counted as price inflation). This is probably caused by price inflation, which causes wage inflation, which allows me to raise the rent (my tenants have more money!).
Of course, this is an oversimplified example, but it illustrates the point: asset inflation causes price inflation with a long and variable lag. We have had major asset inflation since the 1980s, which has caused price inflation along the way.
I claim that price inflation is weakly coupled with stock prices, but asset inflation is strongly coupled.
I wasn't aware of the "demand-driven" versus "supply-driven" distinction, thanks!
One more distinction: high inflation may be generally bad, but high-and-falling inflation is generally positive for the stock market
https://x.com/edclissold/status/1602676660255576064
In the top figure the graph line is rising. Perhaps it is because the economists at the Fed have been learning how to protect the nation's industry better.
If I understood your post correctly, tariff-driven inflation is bad because it increases costs for consumers and businesses without boosting economic growth or corporate earnings.
The next question is whether the Federal Reserve would reduce interest rates to offset this inflation. If they don’t, inflation could rise significantly higher. However, we might still be in a recession even with an interest rate reduction.
What tools would the Federal Reserve have to pull the economy out of such a recession? If the tariff situation lasts only a few months, it may or may not result in a mild recession. However, if tariffs continue for the rest of the year or beyond, then we may see a recession, which could deepen depending on who continues to be a target of tariffs and how those countries retaliate.
The administration might push for interest rate cuts even before a mild recession occurs, especially if inflation rises above 3%, to argue that tariffs benefit the country. Falling gas prices could provide some relief and are already used by certain parts of the media as a benefit of tariffs, as they indirectly help both consumers and businesses, but it may not be enough to offset the broader inflationary pressures caused by tariffs.
Effectively, tariffs provide a stagflationary impulse that forces the Fed to either fight inflation with higher interest rates (and thus make the recession worse) or hope that inflation doesn't become entrenched when it cuts interest rates to boost the economy. It is the identical situation as the Fed was in in 2022 when oil and natural gas prices skyrocketed and global supply chains were disrupted due to China's Covid lockdowns. Guess what? The tariffs will disrupt global supply chains and, in particular, Chinese supplies in a way that makes the pandemic look like child's play.
I don't buy into the argument of so many pundits that the Fed's next move is to accelerate rare cuts to boost the economy. That is the same mistake the Fed made in the 1970s when it bowed to pressure from the White House and the public to cut interest rates to keep unemployment rates low. The result was inflation that got increasingly out of control until Paul Volcker had to induce a double-dip recession with massive rate hikes in the early 1980s.
In 2022, the Fed managed its response much better and ensured it first got inflation under control before addressing a slowdown in the economy. However, with the current occupant of the White House, I fear the pressure on the Fed to cut rates would be immense, with potentially very harmful long-term consequences.
The Fed's problem is that it has only one tool (interest rates and the ability to influence the government bond yield curve), and that one instrument cannot serve two masters at the same time. That is one of the reasons why tariffs are so terrible for the US. Donald Trump has made Americans much poorer in the short and long term.
I'm concerned that the inflation we saw in 2022 could seem insignificant compared to what lies ahead if the current administration continues to undermine democracy and dismantle government bureaucracy from within. If this trend continues, the consequences could go far beyond economic instability. Eroding public trust in institutions, weakening accountability, and deepening societal divisions could have profound long-term impacts. The damage to our institutions and democratic norms may take decades to repair, leaving lasting scars on the country. The question is, can we do it? Only time will tell.
Suppose I buy an apartment building in 2009 for $1 million. In 2022, after many years of QE and ZIRP, and no real economic growth, the building is worth $2 million. This is asset inflation. At some point, the rents have to increase (which is counted as price inflation). This is probably caused by price inflation, which causes wage inflation, which allows me to raise the rent (my tenants have more money!).
Of course, this is an oversimplified example, but it illustrates the point: asset inflation causes price inflation with a long and variable lag. We have had major asset inflation since the 1980s, which has caused price inflation along the way.
I claim that price inflation is weakly coupled with stock prices, but asset inflation is strongly coupled.
Cheers!
Fair point. And you just fave me something to look into, thanks.