Government officials in Washington D.C. argue over anything — even the color of the sky.
So it’s significant when they do agree.
Right now, there’s consensus on one issue: Inflation is too high.
Inflation Hurts the Average Family
To understand inflation’s impact, we can measure it against the average family.
The Consumer Price Index (CPI) increased 8.6% in May 2022 from where it was at the same time last year. The Bureau of Labor Statistics reported that average wages grew 5.2% in that same time frame.
The difference between the two values shows how far families can fall behind.
We can use a similar process to determine how much inflation is in the economy.
Inflation Within the Economy
Gross domestic product (GDP) measures economic activity. Real GDP measures economic activity without factoring in inflation.
The difference between the two shows the amount of inflation within the economy. You can see that in the chart below.
Readings above zero signal inflation, and you can see it’s almost off the chart!
Inflation Is Sky-High
Source: Federal Reserve.
By this measure, there was $1.7 trillion worth of inflation in this latest reading. Since the pandemic ended, this measure shows a cumulative quarter-over-quarter value of $2.4 trillion.
In other words, there is $2.4 trillion more than the economy can use without generating inflation.
The government contributed to this problem.
The Stimulus Contribution
Total government stimulus spending adds up to about $4.6 trillion. The Federal Reserve created another $6 trillion in money through quantitative easing (QE).
We needed trillions of dollars, but we didn’t spend all of that $10 trillion in new money on the right things. Much of it contributed to inflation.
That is good news. As stimulus spending winds down, the Fed ends its easing programs. For example, higher interest rates force businesses and consumers to spend less.
Less money and less demand should lower inflation.
Bottom line: In the past, inflation appeared suddenly, as it has this time. It also fell just as suddenly.
With the government and the Fed out of the way, it’s possible the private sector can spend those trillions of extra dollars on productive projects.
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Michael Carr is the editor of True Options Masters, One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.
