Today’s Policy Prescriptions May Prolong The Inflation Problem

Today’s Policy Prescriptions May Prolong The Inflation Problem

The Fed (Powell) says the economy is strong and has signaled several rate hikes beginning in March. The data (and the Fed's own Beige Book) say otherwise. But this politicized Fed appears to have no choice as the Administration's poll ratings are at record lows, much of it due to inflation. Unfortunately, the tools that the Fed has are inappropriate to fight a supply induced inflation. The ultimate consequences of their actions could possibly lead to a continuation of today's high inflation levels. For the past two months, this blog worried that the "shortages" narrative had pulled holiday sales forward into October (+1. 8%) and November (+0. 3%) and that December sales would "disappoint." That proved prescient. Retail Sales fell in December by a non-trivial -1. 9%. Non-store sales (read: Amazon) fell by a hard to believe -8. 7% which gives credence to our hypothesis that demand was "pulled-forward." For most of December, omicron wasn't much of a concern. After-all, it was milder than delta and there were only a few cases. Then the country got together for the holidays, and now omicron is everywhere. Surely, January's consumer data will be weaker. As for businesses, the tsunami of absenteeism is