US inflation long-tail risk to global recovery

It can be seen that this round of inflation in the United States is driven by multiple factors.

Although it has similarities with previous rounds of inflation, the differences are obvious. In addition to the traditional factors, currency over-issue, the impact of the epidemic, and the geopolitical situation have all added more variables to the current round of inflation in the US. These factors have exacerbated the demand-driven inflation triggered by the Joe Biden administration's aggressive fiscal stimulus plans and the cost-driven inflation due to rising labor costs and low labor participation rates under the epidemic.

The more important factor is the high inflation caused by the over-issuance of the US currency. After the Federal Reserve quickly lowered the federal benchmark interest rate to zero in order to save the market two years ago, it quickly launched an unlimited quantitative easing monetary policy. So far, the Fed's balance sheet has hit a record high of more than $8 trillion, nearly 10 times what it was in 2008. However, the over-issuance of money in the real economy cannot be absorbed, so it can only flood the market and push up prices. The inflow into the stock market and the housing market also pushes up stock prices and house prices.

Fiscal stimulus implemented by the US government has boosted inflation from the demand side.

As a result, the US federal debt hit a record high of $30 trillion, and its debt ratio jumped from 79.2 percent before the pandemic to more than 100 percent. Fiscal stimulus is invariably transformed to financial support or subsidies to households, businesses, local governments, hospitals and the like.

However, it is difficult for the economy to recover in the context of the intensified epidemic in the US and the influx of these funds into the realty market is pushing up house prices and the prices of commodities.

The combination of these factors has left the US facing inflation stoked by both rising costs and demand. Under the impacts of the pandemic, the labor participation rate in the US has dropped sharply, leading to an increase in employment costs, which in turn has squeezed corporate profits and further inhibited investment, thus creating a negative cycle.

Therefore, it may be difficult to control inflation simply by raising interest rates by a large margin in a short time.

21ST CENTURY BUSINESS HERALD