Chief Economist CornerNews

Consumer Price Index (CPI) Increases, Economic Growth Stalled Despite Federal Reserve Efforts

Consumer Price Index (CPI) is the best-known indicator of measuring an increase or decrease in inflation. It measures the percentage change in the price of a basket of goods and services consumed by households. Inflation has been a major problem for the US economy inhibiting economic growth. Despite aggressive interest hikes by the Federal Reserve, the CPI increased by .04% which was greater than the expected .03% predicted by economists. There has been an increase of 8.2% inflation over the last 12 months preventing a robust economic growth coming out of COVID and causing a recession.

The main reason for inflation has been the rising cost of energy prices, including fuel costs. As the economy was rebounding from COVID, the current administration changed US energy policy with the deliberate intention of raising gas prices as a way of decreasing its usage to decrease CO2 emissions. This has had the opposite effect. It has increased greater reliance both in the United States and Europe on coal which has increased CO2 emissions. Coal is a much dirtier fuel source but a cheaper one. The US was a net exporter of oil but now we are a net importer of oil by 3.9 million barrels per day (bpd). Basic economic theory of supply and demand explains this phenomenon. If you increase the demand and decrease the supply of a commodity, it will raise the price of the said commodity. This is what happened with the deliberate change of energy policy by the current administration.

As the cost of fuel goes up, it increases transportation cost and in turn the cost of all other goods. The only policy solution put forth by the Biden administration is to have the Federal Reserve aggressively raise interest rates to curb inflation. Without increasing the supply of oil production domestically this policy approach is incapable of solving the problem of inflation long term. Chairman Powell, the head of Federal Reserve, has said that we must be willing to raise the sacrifice ratio which means to sacrifice economic growth and jobs to curb inflation. Of course, as soon as inflation decreases to an acceptable level and the economy tries to expand the price of oil and other energy commodities will increase again causing inflation. This destructive cycle will continue until the underlying issue of an increase in global oil supply has been properly addressed. The Federal Reserve is trying to curb inflation by decreasing demand so the price of energy falls. This is a very shortsighted and it does not address the root cause of the problem.

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