Today, the Labor Department reported consumer prices were up 0.5percent in March, driven by 3.5 and 0.8 percent jumps in energy and food prices.
This is the fourth straight month of large gains in consumer prices. While food and energy prices may be volatile, international conditions indicate commodity prices will continue surging, and the Fed’s emphasis on core inflation is absolutely misplaced.
With inflation running at 6 percent a year, it will be tough for the Federal Reserve to deny inflation and continue quantitative easing and low interest rates generally. Similarly, with unemployment likely to remain above 8 percent for the balance of the year, the Fed will find it tough to raise interest rates too much.
The U.S. economy is headed for stagflation thanks to failed banking and international economic policies that lie largely beyond the Fed’s control.
At the heart of the Great Recession and now stagflation are two dysfunctions—problems in U.S. banking, and China’s currency policy and Germany’s privileged position in the EU. For different reasons, but with the same effect, China and Germany enjoy undervalued currencies and protected domestic markets, and are creating imbalances in demand for goods, services and workers globally.
Recent banking reforms have not changed how Wall Street does business—the emphasis is still on trading instead of making sound loans. Whereas before the recession banks made reckless loans—based on the shady practice of pushing loan-backed securities on unwitting investors—now they are starving small and medium-sized businesses for the credit needed to create jobs.