Inflation in the United States: Predictions and Realities

With the current economic conditions, the possibility of inflation hitting double-digit levels in the United States is becoming a realistic concern. This article explores the factors driving inflation, the role of oil prices, and the likelihood of such a scenario occurring.

Factors Driving Inflation

The increase in oil prices is a critical factor in determining the trajectory of inflation. If oil prices rise towards 120-130 per barrel and stay at that level, it is highly likely that inflation will reach double digits in the United States. This is due to the significant impact that oil and fuel prices have on the overall cost of living.

Impact of Oil Prices on Inflation

Oil prices hold the key to whether inflation will hit 10. Once oil prices stabilize around these levels, it will exacerbate the inflationary pressures on the economy. The Federal Reserve (FED) may find itself with limited options to combat this issue, as any increase in interest rates may be counterproductive. Hiking rates could stifle economic growth and production, akin to chemotherapy's impact on both healthy and unhealthy cells. This scenario could eventually lead to a recession, possibly even stagflation.

Real Inflation and Calculation Methods

Real inflation in the United States is already above 10%, but the Federal Bureau of Labor Statistics (BLS) has altered the method of calculating inflation, causing it to appear lower. According to a report, the switch from a cost of goods index (COGI) to a cost of living index (COLI) is a deliberate manipulation by the U.S. government to present a lower Consumer Price Index (CPI). The article cited states that the PPI at 11.5 and other factors indicate that the actual CPI is on its way to double digits by November, especially if it is calculated the way it was in the past, including fuel and food.

Why Exclude Fuel and Food?

A key reason for excluding fuel and food from the CPI calculation is to hide the true state of inflation from the public. Americans cannot live without these essential commodities, and their prices have a direct impact on everyday living costs. By excluding these factors, the government is able to report a more favorable CPI figure, thus avoiding public backlash and undermining public trust in the economy. The fact that the government continues to exclude these items from the calculation suggests an intention to mislead the public regarding the severity of inflation.

Historical Context and Current Trends

It is debatable whether an inflation rate of 10 is possible given the surprising success of central banks in the post-1970s fiat money world. Post-1970s, the biggest failure was runaway inflation near double digits, which was a special case influenced by the oil shock of the 1970s. This oil shock made our capital stock inefficient, resulting in poor productivity growth for years. However, the current economy is much less energy-intensive due to the internet and global trade, which continue to depress prices. Additionally, the recent decline in 10-year bond yields from 1.8 to 1.3, despite the FOMC suggesting short-term rates might rise, indicates that slow, steady growth is the new normal.

The conclusion is that while the possibility of inflation hitting double digits remains, it is unlikely due to the recent economic trends and central bank strategies. However, the ongoing evaluation of economic indicators and global events is crucial to monitor and ensure effective policy adjustments.