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The Fiscal Scapegoat
Skepticism around the return of core inflation to central banks' 2% target remains pervasive despite good news in some key locales.
In the US, the latest update on consumer price growth did indeed suggest that underlying, trend inflation may be on track to moderate, and there was tentative evidence of progress out of the UK this week, but core CPI was revised higher for the eurozone, underscoring the uphill nature of the battle.
The simple figure below underscores the point. Core is barely off
Inflation pessimists are everywhere. Here is the thing. Fiscal stimulus that remains is an echo. In the US, there will be no further fiscal stimulus until 2025 at the earliest due to politics, even if warranted. Monetary policy is either neutral, or in my view tight. It is not easy. Demographics suggest a headwind except in housing for maybe another year or two. Finally, it is highly likely that the production possibility curve moves out as consumers and businesses adjust to new realities and continue to harness tech and new methods of providing goods and services.
Starting to feel like ongoing climate disaster recoveries, especially with insurers pulling back, will be the next flavor of fiscal stimulus.
They filled the punch bowl with a fire hose and are draining it with a cocktail straw…
Why so negative? Many of our friends in the GOP point out that there would be plenty of money for defense spending if we simply eliminated all foreign aid, subsidies for alternative energy, food stamps, “medical welfare” like Medicaid and wasteful aid to Ukraine. And, of course, further reducing immigration cannot be forgotten.
It’s all laid out in proposals from DeSantis and Trump.