The Bureau of Labor Statistics just released the Consumer Price Index (CPI) for May. Consumer prices increased a whopping 1%. That raises inflation to 8.6%, the highest rate in more than 40 years. Unfortunately, the rate will increase in the coming months.
This large increase will also cause the Federal Reserve to raise interest rates by at least 50 basis points when it meets next week. It’s even conceivable that the Fed could be more aggressive and raise rates by 75 basis points. In July, after the June CPI is released, the Fed will likely get even more aggressive, meaning a 100 basis point increase is possible.
Food prices are about to skyrocket. That’s because farmers are paying more than double the price they paid last year for fertilizers. In addition, farmers are having difficulty finding workers. That means they have to raise wages to attract people to work for them. While that’s good for the workers, it means the farmer’s labor cost is rising.
FOOD SUPPLY PRESSURES
Virtually all of their farm equipment uses diesel fuel. We see the price of gasoline is approaching $5 per gallon nationally, but the price of a gallon of diesel fuel is approaching $6 per gallon nationally. The farmers must recover those increased costs by seeking higher prices.
Making matters worse globally, about 25% of the world’s wheat supply and about 10% of the grain supply comes from Russia and Ukraine. Those shipments have been significantly reduced due to the Russian invasion.
Last month, food prices rose 1.4% after rising by 1.2% in April. Larger price increases will be seen in the coming months. Energy prices rose 4.1% in May. Airline fares rose a shocking 38%.
Already in June, we are seeing record-high gas prices nearly every day. That means the CPI for June could exceed the 1% increase just recorded in May. That will take the 12-month inflation rate to near 9%.
As consumers spend more on necessities like food and gasoline, they will have less to spend on discretionary items. That will reduce demand for those non-necessities. As that happens, business will reduce their production and the economy will stall. That’s why most economists are signaling that a recession is probable by year-end.
A RECESSION MAY ALREADY BE UPON US
Actually, we could be in a recession right now. The growth rate for GDP in the first quarter of this year was negative 1.5%. Even though more than 1.7 million workers were added to the payrolls in the first quarter, the nation’s gross domestic product (GDP) declined. The reason was that productivity declined by 7.5% in the first quarter.
Most economists are forecasting growth in the second quarter of this year to be in the 2% to 3% range. Even though employment is increasing, if productivity should remain negative, we could see a negative growth rate for the second quarter. Two successive quarters of negative growth in GDP is the classic definition of recession.
If, indeed, that happens, then the U.S. economy will be experiencing record-high inflation while also being burdened with a stagnant economy. That means stagflation—a condition not seen since the late 1970s.
While the Biden administration continues to claim there is little they can do to fix it—and Biden dismissed inflation as merely “the bane of our existence” to talk show host Jimmy Kimmel this week—we can take some solace in the fact that the U.S. is not as bad off as other countries.
But the stark reality is, President Biden caused this mess. To fix it, he simply has to reverse the policies that caused this problem.
OIL IS PIVOTAL
He should immediately reverse his energy policy to allow the Keystone pipeline to be built, allow drilling on federal land, allow drilling in ANWR off of the Alaska coast, simplify the permitting process and stop telling banks not to lend to the petroleum industry.
Oil production in the U.S. is about 1.5 million barrels per day less today than when Biden was sworn into office.
The president must also reduce government spending. His American Rescue Plan, aka "Build Back Better," and most of the infrastructure spending passed last year were purely inflationary. Government deficit spending is a large contributor to our inflation problem.
Since he won’t do either of those two things, inflation will worsen. A recession is inevitable and so is stagflation. If we are not there today, we surely will be by year-end.
Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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