Larry Kudlow: Inflation has become embedded throughout the economy

First up, today Jay Powell put some more hair on his chest and bolstered his inflation-fighting manhood with the tough talk at the CATO Institute in Washington, DC

He said: “We have to keep at it until the job is done,” adding that “history strongly cautions against loosening policy too soon.”

In fact, the main Fed spokesperson, Wall Street Journal reporter Nick Timiraos, announced on this morning̵[ads1]7;s front page that the Fed will raise its target interest rate by 75 basis points, taking it to 3 to 3.25% from today’s 2.25 to 2.50% . .

It is quite true that some forward-looking inflation indicators such as falling M2 growth, falling commodity prices, a very strong Royal Dollar and adding falling oil to the list all suggest that the worst of inflation may be over, but (and that’s a big but) as Art Laffer told us two nights ago, there is an enormous volume of excess cash still churning around the banking system and economy.


Larry Kudlow: Inflation has become embedded throughout the economy

Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022. (AP Photo/Manuel Balce Ceneta) (AP Photo/Manuel Balce Ceneta/AP Images)

Also, all of these federal subsidy programs (think student loans, food stamps, housing assistance, child support) have a inflationary impact. The income effect puts more money in the hands of the demand side and the lack of labor requirements generates disincentives to get back into the workforce and produce.

Therefore, more demand combined with less supply equals higher prices, or inflation will remain sticky for quite some time as it has become embedded throughout the economy, not only in prices but also in wages.


For example, the inflation tracker from the Cleveland Fed expects that year-over-year CPI for the next two months will stay around 8.2%. Remember that the Fed’s target is 2%. Also, even if the Fed target rate comes to 4% or slightly higher by the end of the year, it will still be a negative rate that is almost always consistent with higher, not lower, inflation.

Adding to our economic woes, the GDP tracker from the Atlanta Fed just downgraded its estimate for the third quarter from 2.6% to 1.4%. It’s a bad sign. We seem to be stuck in an inflationary slump. Two years ago, President Biden inherited a non-inflationary boom. Shows you how harmful big government socialism can be.

This article is adapted from Larry Kudlow’s opening commentary for the September 8, 2022 edition of “Kudlow.”

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