The performance of the financial markets falling globally, real estate reaching stratospheric prices and rising inflation, which accumulates 4.2% in one year, has made the members of the Federal Reserve (FED) consider that it may be time to abandon the easy money measures with which it has tried to stimulate the economy.
Although in the past Fed Chairman Jerome Powell denied that inflation was out of control, the balance of 4.2 % inflation a year after the pandemic began shows that the U.S. economy is overheating faster than central bank bureaucrats had thought.
The truth is that rising inflation is occurring not only because of the Fed’s issuance measures but also because of bottlenecks in global production chains caused by the coronavirus. These bottlenecks range from fuels to microchips that are becoming increasingly scarce.
What is causing the rising inflation in the U.S.?
In the case of fuels such as gasoline, oil extraction and refining have been the two main bottlenecks that are causing the price increase. Many oil companies stopped their extraction and exploration projects during the 2020 lockdowns, which in 2021 is costing them, as the supply fell short of capacity to meet the growing demand (which will increasingly increase with the lifting of mobility restrictions in the world), as revealed in a recent report by the British Petroleum Company.
On the microchip side, the shortage has been caused by the growth of cloud-computing services (which grew in the pandemic due to the high use of the Internet) and by the high concentration of microchip manufacturing in a few production centers, which are unable to meet the growing demand.
Commodities have also risen in price, from soybeans to iron ore. Thousands of U.S. producers are affected by the high costs of importing the precious raw materials for their products.
In part, commodity costs have been affected by port congestion, with the bankruptcy of multiple shipping lines, the costs of shipping cargo from China, for example, have tripled, a situation made even more costly for the economy by the tariffs imposed by the Donald Trump administration and maintained by President Joe Biden.
The latest bottleneck comes from the labor shortage. Although there are still nearly 8,000,000 unemployed in the United States, companies are having trouble filling vacancies, as revealed by the latest report from the Bureau of Labor Statistics. It shows that in April the U.S. economy generated only 266,000 new jobs, far short of the 1 million jobs expected to be generated during that month.
The Fed actions against rising inflation
Several Fed officials believe it may be time to modify current monetary policy as the economy recovers from the pandemic.
“If we get to the point where we feel comfortable on the public health side that the pandemic is behind us and is not going to resurface in some way that would be surprising, then I think we could talk about tightening monetary policy,” said James Bullard, president of the Atlanta Fed.
Some investors believe that to control inflation the Fed will have to raise interest rates to 4.5%. However, this alternative is not without risk, since with the high level of corporate indebtedness many companies may find themselves in trouble to pay their debts, which grew exponentially in the pandemic.