Is U.S. Inflation, Public Enemy Number One?

The U.S. Federal Reserve has made it clear that inflation has moved front and center into its radar screen. That means that just as workers were beginning to enjoy some real pricing power, it will move to dampen growth in the economy to relieve upward inflation pressures. Financial markets also joined the fray as the 2-Year U.S. Treasury Yield popped to 1.48% signaling six 25 basis point hikes in short-term rates by the U.S. Federal Reserve minutes after the CPI report was released on Feb. 10, 2022!

Due to the non-partisan nature of all my analysis, I will leave it up to the reader to decide whether policymakers should eradicate upward inflation pressures. Some argue that this is the wrong time to do it because workers are seeing wages moving higher, while others believe we need to fight inflation before we suffer an inflationary spiral similar to the one observed from 1965 to 1982!

But if reducing inflation pressures is “Public Enemy Number One,” as many Republicans and Democrats have maintained, then it’s time to place all hands-on deck in support of this bipartisan initiative.

That means that we should support the removal of the 25% Japanese steel tariffs which will surely reduce U.S. inflation pressures. Many real estate contractors working on U.S. industrial real estate projects say they are struggling because of high raw material prices, so reducing their raw material prices will help them and reduce U.S. inflation pressures.

It also means that the U.S. should at least temporarily consider reducing or eliminating all U.S. Import tariffs imposed on Canadian Lumber, European Steel, and even Chinese Imports. This way the Federal Reserve will not have to raise short-term rates as much to reduce inflation pressures. Higher short-term interest rates not only raise the risk of pushing the U.S. economy into a recession, but also create hardships on American households, first-time homebuyers, and individuals struggling to finance automobile purchases.

Why are we so upset that China failed to keep its promise to buy an additional $200 billion worth of goods in energy, farm commodities, and manufactured goods from 2020-2021? We are not saying we should thank the Chinese for their actions, but their actions will surely permit the Federal Reserve to raise short-term rates by less than they otherwise would have if the Chinese would have purchased the additional $200 billion of U.S. goods.

Some economic pundits argued that generous food stamp benefits and the childcare tax credit offered during the pandemic lifted 50% of children below the poverty line and eliminated childhood hunger but it also boosted demand for food at supermarkets and caused food price inflation. If this is true, then why shouldn’t we be relieved that the Chinese didn’t buy the extra farm or energy products they promised to buy and put less upward pressure on U.S. prices?

In January 2022, the U.S. Consumer Price Index (CPI) report, food, and energy prices were rising by +7.0%, and +27.0%, respectively on a year-over-year basis. That added 1.0%, and 3.0%, respectively to headline CPI accounting for 53% of the 7.5% rise in the January 2022 headline CPI.

I have heard some political pundits say that China should have purchased the farm commodities even if they had to store them for future use or simply allow the food to rot away in their warehouses. I believe that from a non-partisan perspective, using that extra food produced in the United States to reduce childhood hunger sounds a lot more appealing than the thought of seeing food spoil in Chinese storage facilities.

However, did anyone hear OPEC complain when the U.S. and other countries around the world reduced the demand for gasoline and jet fuel after the World Health Organization (WHO) declared Covid-19 a Global Pandemic, as many countries shut down and vastly reduced their demand for energy?

Summary and Conclusion:

Our analysis does not support China’s move to break its promise on the Phase 1 trade deal. It simply acknowledges that the reasons for doing so were due to the pandemic and that the reduced demand for U.S. goods was a blessing due to U.S. supply-chain and labor supply bottlenecks.

If inflation is truly public enemy number one, then the U.S. should be pursuing strategies that reduce U.S. inflation pressures instead of using trade policy as a political weapon. I have no problem using trade policy as a weapon once we accomplish our goal of reducing inflation pressures. But until then, if reducing inflation is our main national goal, then all U.S. actions on a bipartisan basis should reflect this initiative!