An inflation wave is coming, and it will not be because of tariffs. In the United States and the rest of the world, governments and central banks are preparing to fill the pool with red ink and grease up the printing presses. Whether out of fear that the global economy is on the brink of a recession or conditions need a boost, recent actions and proposals signal policymakers think something is on the horizon.
Uncle Sam’s Inflation Wave
Has the inflation situation been resolved in the United States? Far from it. The headline annual inflation rate is running at 3%, the same level it was in January. Some blame this on President Donald Trump’s tariffs, while others contend that eliminating the extra 1% requires spending cuts and a reduction in the money supply. Both are right.
A broad array of tariff-sensitive items is rising, although goods inflation has been moderate. Washington is coming off a $2 trillion budget deficit. The Federal Reserve’s money supply is at a record high. However, rather than reversing course, US officials are making the same mistakes as in the past. This confirms that if you do not learn from history, you are doomed to be a Keynesian.
First, President Trump revived an idea from earlier in his administration: extending $2,000 tariff rebate checks to the American people. It may appear to be justified, given that import taxes primarily affect US consumers. However, as the data routinely highlight, stimulus checks are inflationary because they create artificial demand, bidding up consumer prices. It is the idea of too much money chasing too few goods.
Second, in addition to the Federal Reserve cutting interest rates, the Eccles Building is also unwinding its quantitative tightening cycle and embarking upon round six of quantitative easing.
Fed Chair Jerome Powell confirmed the plan to halt the central bank's balance sheet reduction, aiming to ease financial conditions and inject liquidity into the economy. New York Fed President John Williams recently stated that the institution may begin buying bonds again to help manage market liquidity.
"The next step in our balance sheet strategy will be to assess when the level of reserves has reached ample," Williams said in a Nov. 12 speech delivered to a New York Fed banking conference. "It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves as the Fed's other liabilities grow and underlying demand for reserves increases over time."
So, the Fed will cut interest rates and speed the money-printing process? That’s a paddlin’.
Not Just America
Of course, it is not only the world’s largest economy that is reliving history. Other advanced economies are contributing to a potential inflation wave that could arise in the coming years.
Taking a page out of Abenomics, Japanese Prime Minister Sanae Takaichi is set to approve $110 billion stimulus package to shore up the anemic economy. This comes as Tokyo registered a 0.4% contraction in the third quarter and is suffering from a bout of inflation.
For the past several months, China has been providing the world's second-largest economy with fiscal and monetary stimulus. In September alone, Beijing unleashed $70 billion worth of financing tools, from lower interest rates to a decline in minimum equity capital requirements, to bolster growth, consumption, and investment. Why? Consumer spending has been tepid, factory activity has been slow, and growth is coming in below government estimates.
While Jerome “Too Late” Powell was tardy to the show, the United States has joined the rest of the planet in cutting interest rates. Central banks worldwide, including the Bank of Canada and the European Central Bank, have been lowering their benchmark interest rates in response to weaker economic growth prospects. According to The Kobeissi Letter, global rate cuts have exceeded 300 over the past 24 months.
The coup de grâce? International liquidity is accelerating as the global money supply reached $142 trillion in September, representing a 446% increase over the last 25 years.
US Affordability
The hot topic in Washington politics these days is affordability. Despite inflation soaring to a 40-year high under the previous administration, the mainstream media and Democratic leaders are blaming President Trump for the cost-of-living crisis that occurred over the last four years. However, rather than enduring a post-pandemic-era inflation tsunami, the US economy is still swimming in a ripple. The concern is that it will eventually metastasize into another wave, keeping the annual inflation rate in the current range of 3%, firmly above the Fed’s 2% target.
With the president’s approval rating sinking due to inflation, according to the Liberty Nation Public Square polling data, persistently high prices will continue to erode sentiment and support.
