Starting to deal with a growth economy

us-inflation-2016

The surest bet in the world has always been that the Fed would hold off raising rates until the election was over, and then when it was over, if Trump had won, rates would start to climb. Which brings us to this story: Watch out for a Trump-Yellen showdown. Yellen had, of course, said that the Fed never takes politics into account when it makes its decisions. But there is of course this that somehow suggests one more untruth.

Before the election (during which Trump accused her of holding rates down to boost stock prices for Obama) she publicly stated it could be advantageous to let the economy “run hot” for a time, but suddenly a few months later, she now thinks that’s a bad idea.

But what is quite impressive are the data on the CPI which are all from the time of Barack Obama, in relation to which we find this:

To Yellen’s credit, inflation has soared over the last two months.

An inflation rate that is too low is one of those ideas that only a statistics-driven modern economist can see bad news in. But the good news, for me anyway, is that rates will go up. Yellen – although to hear her tell it the outcome will not in the slightest be politically driven – will do this to help the Democrats. Trump will see what she is doing and think she is trying to sabotage him, which she is. But in my view, rates will rise, Yellen and Trump will think this will flatten the economy, but in fact it will be part of the necessary readjustment process that over the next year or so will cause the economy to finally take off.

Whether inflation also takes off will depend on the labour market, but we are at least a couple of years away from a serious wage inflation. That is what will have to be managed. In the meantime, it will be pleasant for a change to be dealing with an economy that is finally on the up.

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