Inflation and its political origins

The current inflation highlights toxic results: increases in central bank interest rates, slowing or sterilizing growth and employment. But originally it is not their fault, due to an excessive supply of money that heated the economy too much. But politics: it is triggered above all by the actions of Donald Trump.

It is, thus, a trumpflation. Originated in the increased cost and difficult energy supply due to the war (and/or blockade) against Iran. Its increasing cost triggers the US deficit and debt, discrediting the bonds that finance these holes, and forcing their yield to rise to records above 5% (for 30 years). The exorbitant desire for capital of the Trumpist technology companies competes with public assets and makes their bill even more expensive.

And while the Treasury tries to lower it with magic tricks on the terms (reducing the long term and increasing the short term), the new head of the Federal Reserve, Kevin Warsh, has just sworn that he will combat inflation. It reached 3.4% in August, one point more than in February: a curve that demonstrates that peace would curtail the rise in prices (after reaching 4.2% in May). We'll see if it complies and raises rates. Or if he kneels before the White House, postponing the decision until after the midterm elections, on November 3, to favor his employer.

In Europe, the ECB will decide next Thursday, the 10th, whether or not to repeat the June increase, 0.25%. It is claimed, as always, by the stubborn German hawk, Isabel Schnabel. With a fallacious argument: “With the current interest rate, it is unlikely that inflation will return to the objective in the medium term and therefore additional tightening will be necessary.” False, because that will depend on the war.

It is true that the inflation data for August is bad, at 3.3%. And it is true that the ECB's objective is that general inflation, measured by the HICP (Harmonized Index of Consumer Prices, for its acronym in English) does not exceed 2% in the medium term. When it exceeds it, the alert goes off. But it should only rise to alarm status if core inflation (which excludes the most volatile elements, such as energy and food) spikes sharply.

By putting aside the more temporary factors, the underlying (underlying: core, or supercore, the latter also excludes housing prices) better outlines whether the inflationary pressure is going to be only temporary, rather than permanent. A key element to refine the analysis are the “second round” effects of energy and food price increases.