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The burgeoning U.S. economic recovery is pushing prices up, pacing inflation at 5 percent year-over-year last month, more than twice the U.S. Federal Reserve’s stated target rate of 2 percent and faster than any time since August 2008.
The core inflation rate, which leaves out food and energy, grew at an annualized rate of 3.8 percent in May. It was the fastest growth since 1992 and followed a 3 percent bump in April.
The Fed continues to insist that inflation is temporary and will weaken significantly after supply chains clear shortages and bottlenecks as the recovery progresses.
“We believe this will be the peak in the annual rate of inflation as the strong base effects subside in the coming months,” Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, told the Financial Times.
The term “base effects” refers to the fact that prices actually were reduced last year for many items, such as gasoline, and price hikes now are, in part, merely returning prices to where they were before the crisis struck.
That belief, shared by many economists as well as the Fed, keeps the central bank from raising interest rates to curb inflation, even though a growing number of analysts express concerns that inflation will gallop at an even faster pace in the months ahead, according to the Wall Street Journal, and may even become structural as part of a commodities supercycle. (“Commodities Supercycle Underway?,” Trends Journal, 11 May 2021.)
However, inflation and the recovery are moving so briskly that some Fed officials have hinted that it may be time to begin discussions about tightening policy.
Some economists and Republican politicians argue that the Fed is underestimating inflation’s future.
“Investors are doing everything in their power to avoid holding cash, which accounts for the historic bubble seen across all asset classes — stock markets, housing, Bitcoin, art, collectibles, really anything except dollars of eroding value,” William Levin, manager of the investment banking firm The Levin Group, wrote in the 8 April 2021, issue of the National Review.
“Equally, investors are increasingly unwilling to hold the U.S. dollar in relation to other currencies, as seen by the one-year, 10.1-percent decline in the dollar against all currencies.”
U.S. Federal Reserve Chair Jerome Powell “blandly promises that inflation is no threat,” Levin notes, but “by the refusal to hold cash, investors demonstrate that inflation is far higher than measured by the [Consumer Price Index] and that the threat is growing.”
TREND FORECAST: We maintain our forecast for long-term dollar decline as the economy begins to slow after the “Biden Bounce” and the government injects more cheap money to artificially boost GDP growth. And the further the dollar falls, the higher inflation will rise since it will cost more to make purchases. And as the dollar falls, gold and silver prices will rise.