After a final pullback in June that gave the Federal Reserve hope of a soft landing at last, one of the central bank’s favorite inflation measures rallied again in July. Headline PCE inflation rose 3.3% for the year ended July, compared to 3% in June. For the first time since January, core PCE inflation, perhaps the Fed’s most important inflation measure, rose to 4.2%, more than double the Fed’s maximum target of just 2% annualized inflation.
Check out the details and the data only gets more disappointing. Core non-home services, a measure of inflation favored by the Fed and White House, rose from 4.1% to a staggering 4.7% in the 12 months to July. This contradicts the Atlanta Fed’s Raphael Bostic’s claim that “stubborn (and declining) housing service prices” alone are responsible for keeping core inflation from falling to the Fed’s benchmark.
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Whether or not the Fed will decide at least one rate hike before its November meeting is now a dead heat, according to futures markets. The misguided assumption that the Fed would start cutting interest rates in March last year was priced out in futures markets, doggedly following Fed Chair Jerome Powell’s forecast that rates would stay higher even longer than investors expected just last month.
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Unlike the triumphant days of Paul Volcker, today’s Fed chair is actively working against, not with, the President. In contrast to Ronald Reagan’s fiscal tightening, Joe Biden’s relentless pursuit of inflationary fiscal policy is forcing the Fed to work twice as hard to get half as much. The result? Next year, net interest payments to service our skyrocketing national debt will exceed what the government is spending combined on Medicaid, the Supplemental Nutrition Assistance Program, and Supplemental Security Income. By 2027, interest payments will account for more federal spending than defense spending, and by the end of the decade, interest payments will account for a record 3.2% of our annual economic output.
With inflationary pressures like these, the timeline will only accelerate.
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