Political analysis and commentary
This morning’s consumer price index number came in at an unsurprising 7% increase in all prices between December 2020 and December 2021. In a tepid written statement, President Biden expressed contentment with a fall in the energy, natural gas, and gasoline indices. While food prices did increase, their rate of increase was lower in December 2021 than in November 2021. Mr Biden touted his American Rescue Plan, signed in March 2021, as the mechanism containing price increases and a source of the strong economic growth being seen in the United States.
The lack of enthusiasm behind the statement may be due in part to the economy’s growth. Yes, growth in the United States is positive, coming in at 2.3% annualized in the 3rd quarter of 2021. But this rate is approximately one-third of the 2nd quarter 2021 growth rate of 6.7%. When we remove energy and food price increases from CPI, done because of the volatility in those prices, we still get an annualized increase in prices faced by consumers of 5.5%.
Compounding the mixed growth results is the rise in the dollar index. Since Mr Biden’s inauguration, the dollar has increased in strength, rising approximately 4.9% in value between 20 January 2021 and 12 January 2022. Typically this means that foreign nations find it more expensive to purchase dollar-denominated goods and services. Exporters may have to reduce prices which benefits domestic consumers. The increased demand for goods and services domestically, on the other hand, could lead to an increase in prices here at home.
When evaluating the political environment surrounding inflation, traders should be wary of the narrative coming out of the Executive branch as it pertains to policies. Controlling inflation is done by controlling money supply and that feat is the responsibility of the Federal Reserve. The American Rescue Plan is budget legislation. It is fiscal policy that lays out the spending priorities of the federal government. On the flip side, you could make the argument that government, by injecting $1.9 trillion into the economy, is increasing aggregate demand for goods and services. Inflation, however, is not a consumption demand problem. It is a money supply problem, and traders should bear in mind that any narrative surrounding inflation should come from that premise.
In short, traders should take Mr Biden’s assessment of his actions pertaining to inflation with a grain of salt.
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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.