Economist: The Fed has not tamed inflation.

This article was written by PeterMorici, emeritus professor of business at the University of Maryland.

The Fed should be cautious about inflation. In September, the year-on-year growth rate of the consumer price index (CPI) in the United States dropped to 2.4%, but core inflation excluding food and energy remained as high as 3.3%. Prices of necessities such as health care, cars and homeowner's insurance continue to rise rapidly. The fall in oil prices has slowed down overall inflation, but it is easy to reverse.

In September, non-energy goods in the United States only reduced CPI by 0.2%, while non-energy services, which accounted for 61.3% of CPI, increased by 4.7%-including housing costs by 4.9% and other non-energy services by 4.3%.

There are four points worth mentioning:

First, rising prices have a lasting impact on consumers' psychology. According to the survey of the new york Federal Reserve, the World Federation of Large Enterprises and the University of Michigan, the average annual inflation rate in the United States is expected to be higher than 3%, which is consistent with the core inflation and higher than the Fed's target of 2%.

It is expected to affect the positions of trade unions and individual workers in wage negotiations and business planning. For example, Boeing workers demanded that the company raise wages.

Second, federal policymakers should admit their mistakes, otherwise they may repeat them and won't be praised for their success. For example, the Trump and Biden administrations spent a total of $4.5 trillion on aid during the COVID-19 epidemic, and the Federal Reserve also bought bonds and other securities with similar amounts, which greatly expanded the money supply in the United States.

These measures boosted consumer demand and pushed the overall inflation to 9.1% in June 2022. Relief measures during the epidemic were too generous, and when the blockade was lifted, workers returned to work slowly, prolonging the upward pressure on wages and prices.

Instead of acknowledging the cost overruns, Biden's administration further pushed up the federal deficit through the Chip and Science Act and the Inflation Reduction Act. This year, the federal budget gap accounts for 7% of GDP, compared with 4.6% before COVID-19.

As enterprises increase their investment in artificial intelligence, additional private investment and federal debt will compete for new savings in financial markets. Either the Fed allows interest rates to be much higher than before the epidemic, or we will face more inflation.

Harris, the US vice president and Democratic presidential candidate, blamed part of the inflation on the landlord's use of algorithms to set rents and the price manipulation of supermarket chains. However, many economists have found that the profit rate of supermarkets has not increased, and it has nothing to do with the recent increase in food prices. The new york Federal Reserve found that grocery prices are mainly driven by rising wages and fluctuating commodity prices.

Supporting the prohibition of algorithmic pricing and accusing enterprises may score higher among progressive voters, but it limits Harris's appeal among moderate and swing voters. Algorithm pricing is very common-think of airlines and Amtrak. Prohibiting this practice may lead to the inefficiency of fare adjustment for rationing shortage during peak demand, and the discount will be reduced when the seats are sufficient, thus limiting the opportunities for low-income passengers.

Today, the GDP of the United States has returned to the predicted trend before the epidemic, and the economy continues to increase employment strongly. In political swing states, the unemployment rate is generally lower than the pre-epidemic level. However, Biden's administration did not perform well in dealing with the economy, and Harris also encountered difficulties in the competition between the swing state and Republican presidential candidate Trump.

Third, economics inevitably succumbed to the political agenda. An industry has sprung up to discredit "neo-liberal economics" and give new credibility to monetary theory, that is, large-scale deficits financed by printing money can support generous social projects.

The Brookings Institution's research attempts to blame the high inflation in the United States on the shortage of supply chains, "especially the increase in corporate profit margins"-rather than excessive epidemic relief policies.

When the supply is limited, the profit rate will rise. But now many companies that produce non-essential goods, such as IKEA and Nike, are under pressure to cut prices.

In order to avoid the long-term trade-off between high interest rates and inflation, the federal government must either cut welfare programs that account for more than 60% of its expenditure or levy taxes similar to those in Europe.

Fourth, economic growth under moderate inflation is beneficial to the stock market. The 25 years before the global financial crisis was a period of rising CPI inflation, with an average CPI of 3.1%. During this period, the S&P 500 index rose by an average of 13.7% every year.

In the past two years, inflation has averaged 3.1%, while the share price has increased by more than 20% every year. Stock returns may slow down in the future, but economic growth and profits are crucial to keep stock prices rising.