Doomsday economics: how to fight inflation in 2024?

For the past 2 years, doomsday economists have forecast that the US will enter recession very soon.

See any problem with that?

Not only it never happened, but the last figures show that the economy is roaring at a 4.9% clip…

Today, we are witnessing that the American economy continues to expand while inflation is decreasing. Granted, the inflation is still much higher than it should be, and it’s hurting people.

?But it’s not hurting “The US Economy”.

Should that be paradoxical?

There is this conception that what is good for the country is good for its people.

Wrong.

The “US Economy” and “The People” live on 2 different planets.

The core of the dispute among economists, market participants, and analysts has been the potential economic impact of the fiscal and monetary policies essential for reducing inflation to the Federal Reserve's targeted rate of two percent.

Everybody said that inflation would not recede from the high levels of 2022 without a recession.

But the reality was to what extent a US-Made recession (I.E The Fed) could decrease and what measures were required to achieve this reduction.

Over the past two years, different camps have debated this issue.

Let’s go over all of them…

1 the team “long transitory"

They argued that supply constraints, along with external factors like Putin's price hikes and corporate pricing strategies, were responsible for inflation. The idea is that inflation would naturally subside as the economy adjusted to the post-pandemic environment.

2. The team “Immaculate disinflation”

They believed that the economy could reduce inflation without significant Fed intervention and negative economic repercussions.

3 The team “Greedflationists”

They asserted that corporate greed, triggered by President Biden's election, led to an unprecedented outbreak of inflation.

4 The team “soft-landing”

They believed that some Fed tightening was necessary, but a recession could be avoided when bringing down inflation to two percent.

5 The team “hard-landing”

Those guys were divided into two groups, one expecting the existing tightening to cause a recession, and the other believing further tightening was required to induce a recession.

6 The team “Bankers”

They said that only a recession or a “credit event” could end high inflation.

6 The team “no-landing”

The declared impossible for inflation reaching to reach two percent anytime soon, possibly because they expected the Fed to lose its resolve due to the downturn resulting from further tightening.

?

The Fed position

Fed Chairman Jerome Powell and some officials, including Governor Chris Waller and Richmond Fed President Tom Barkin, believed that the current high growth coupled with falling inflation was unsustainable.

They proposed that if inflation was to keep decreasing, growth would have to drop below two percent. If growth remained high, inflation could rise. The Fed could keep rates steady next year if growth decreased on its own, but if not, further rate hikes might be necessary.

The government stance contradicts Powell's perspective. The government believes that high growth and decreasing inflation can coexist. This implied that there was no need for tighter monetary policy or less expansionary fiscal policy. In fact, additional rate hikes or spending cuts would be deemed unnecessary cruelty.

The government even cautioned against Republicans cutting programs essential for working families and seniors.

Who’s right, who’s wrong?

All those conflicting viewpoints will lead to a fierce dispute next year if inflation persists or shows signs of a second wave of price increases. The Fed's response might involve rate hikes, while the current administration could accuse the Fed of undermining the economy ahead of the presidential election.

There are concerns that the disinflation that reduced rates from last year's historic highs is losing momentum. In September, the personal consumption price index rose by 0.4 percent for the second consecutive month, annualizing at 4.4 percent, well above the Fed's target.

Core PCE inflation reached 0.3 percent or 3.6 percent annualized, a significant rise from August. Leading indicators like median and trimmed mean measures suggest persistent and stubborn inflation rather than a continuous decline.

So, how do we fight inflation?

What we need here are not economists, but creative thinkers…

Anyone ?