Why Inflation Threatens The Middle Class

The consumer price index is up 2.5% over the past 12 months, the highest inflation rate in four years.

Buffeted by slow growth and too few decent paying jobs, Americans now have to deal with more inflation.

In January, consumer prices rose 0.6%. Although that was driven by a surge in energy prices not likely to repeat, core inflation — prices less food and energy — has been greater than the Fed’s target of 2% for the last year.

Yet, economic growth is not likely to accelerate enough to support wages that rise as fast as prices going forward.

Donald Trump’s promised tax cuts and reforms, infrastructure and deregulation initiatives are likely to face a host of obstacles. Those include congressional Republican opposition to further increasing the budget deficit, opposition from adversely affected parties like Wal-Mart and other retailers regarding border tax adjustments, and legal challenges to executive orders — for example, easing labor market and financial regulations.

America's 75 million baby boomers have piled up more debt while holding less savings than generations before them, a mix that is crimping their hopes of a comfortable retirement.

The Federal Reserve will be faced with an uncomfortable choice — raise rates too quickly to combat inflation or continue printing more money in hopes of further supporting economic growth.

Here are four things to know about higher inflation.

1. More Money Won’t Boost Growth

Much of what caused the financial crisis and slow growth has not been fixed. Big banks are still too big to fail and without a structural solution — namely breaking up the largest institutions and reinstating Glass-Steagall — deregulation or simply lax enforcement of existing rules by former Wall Street executives, who made fortunes making deals and trading, poses new risks.

Subsidized Chinese products are still flooding U.S. markets, destroying good-paying manufacturing jobs, and Trump is backing off his campaign promise to directly challenge Chinese protectionism.

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Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.

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