The prevailing narrative is that Kevin Warsh and the rest of the Federal Reserve’s governing committee caught a break on the most recent inflation report, which had average consumer prices rising by 3.4 percent from a year ago. That was enough for inflation to have “cooled” from June’s 3.5 percent rate. Pairing that with a poor jobs report, prognosticators believe that the Fed has the data it needs to keep interest rates steady another month. Refusing a rate hike would avoid upsetting the president and, even scarier, the stock market.
But inflation has cooled only based on the cheap standard of whatever it was last month — not the official target of 2 percent that Warsh insists he is maintaining. As the Washington Post editorial board points out, currently “low” inflation is 70 percent above this benchmark and has now been above target for 64 consecutive months.
The difference between 2 percent and 3 percent inflation may not seem that significant, but compound interest is a tricky thing. Inflation at 2 percent means that the dollar loses half its value in 35 years, whereas inflation at 3 percent cuts that time frame to 24 years. All the distortionary effects of excess money creation are amplified accordingly.
Americans are not capable of paying higher prices for everything simultaneously without a larger money supply. Thus, inflation is not just a problem of transient energy costs. So long as inflation stays above 2 percent, the money supply is expanding too quickly on monetary policy that is too loose, and corrective action remains necessary.