Regular Hotline readers will recall that we predicted back in the late summer that inflation had peaked and would recede in the months ahead. This was because the forward-looking indicators we think are most reliable – such as the big slowdown in M2 growth, the flattening of the CRB commodities index, and the stable gold price – were all signaling lower inflation to come.
The chart below sent by one of our readers is highly instructive. Look what has happened to the growth of the monetary base. The Fed massively expanded the money supply in 2021 through the Summer of 2022 in order to accommodate the trillions of dollars of government spending by Biden.
More government spending and easy money from the Fed allowed inflation to explode to 9.1% last summer. Remember, when Biden entered office the inflation rate was 1.4%.
The damage to family finances from this two-year misadventure of rapid Bidenflation has been devastating. On average prices for goods and services are up almost 13% in two years, meaning month after month real incomes for the middle class have fallen.
Where do we go from here? Our view is that at this point we need at most one more Fed rate hike. Now the heavy lifting to repair the economy rests with Congress. The cancer cell in the U.S. economy is the runaway government spending and debt – which is feeding inflation and causing a multitrillion-dollar misallocation of capital in the United States from high (private sector) to low (government sector) return investments. Sorry, spending $300 billion on windmills and solar panels and hundreds of billions more to pay people NOT to work is a fool’s errand. Fraudsters have walked away with half a trillion of taxpayer money – ripping off the Medicaid, UI, food stamps, and PPP programs.
Republicans in the House must secure at least a $1 to $2 trillion package of cuts in federal expenditures over the next decade. Federal spending surged past the $6 trillion mark in 2022 with big increases built in for 2023 thanks to the unconscionable omnibus-ted spending bill that was passed before Christmas.