The latest inflation reports have a crucial flaw in their reliance on a moving, 12-month time period. While this method is easy to obtain and widely used, it ignores the cumulative inflation results from preceding months that are still impacting the economy today. It is essential to look at the entire period of inflation, especially during the Covid era, which began in January 2020 and is now entering its fifth year.
The reason for starting in January 2020 is due to the significant money supply increase initiated by the Federal Reserve and the U.S. Government in response to the Covid recession. The injection of trillions of dollars into the financial system is a key driver of inflation, particularly when combined with near-0% short-term interest rates. The Federal Reserve’s actions to reverse the 40% money supply increase have only reached a plateau, with the current money supply standing at $20.8 trillion in January 2024.
Similarly, the Federal Funds rate has seen a long delay in both starting and reversing the Fed’s low-rate, easy money strategy. This delay has contributed to the cumulative inflation rate reaching 20% over the past four years, meaning it now takes an average of $120 to make a purchase that would have cost $100 in January 2020. This drastic change in purchasing power has created an unhappy environment for many individuals whose income, savings, and assets have not kept pace with inflation.
While stock investors may benefit from companies raising prices to compensate for inflation, millions of people are struggling as their finances are stretched thin. Late loan payments, including mortgages, are on the rise, signaling financial distress for many households. The Federal Reserve’s focus on reducing the 12-month inflation number is misguided, as they have overlooked the long-term economic impact of their actions on those who are least able to bear the burden of inflation.
In conclusion, the current inflation environment has created lasting damage for many individuals, despite the Federal Reserve’s efforts to tame short-term inflation numbers. It is crucial to recognize the full extent of inflation’s impact by looking at cumulative inflation over the past several years. As the economy continues to navigate challenges related to inflation, addressing the needs of those most affected by rising prices should be a top priority for policymakers.
