Lack of Good News on Inflation and Economy Courtesy of the Fed

By SBE Council at 13 January, 2022, 1:16 pm

by Raymond J. Keating -

There wasn't much good news from the Federal Reserve and on Fed-related policy outcomes on January 12.

First, the Bureau of Labor Statistics reported that Consumer Price Index inflation continued to run hot in December at 0.5 percent. And for all of 2021, inflation came in at 7 percent, which was the fastest rate since 1982.

Inflation, of course, wreaks all kinds of economic havoc, including creating uncertainty for entrepreneurs, businesses and investors; raising costs for businesses; increasing interest rates; and diminishing the purchasing power of the dollar. In addition, inflation can raise taxes. For example, the real capital gains tax is higher than the stated nominal rate since gains are not indexed for inflation.

"Modest pace" of growth, more (of the same) big challenges for business

Next came the latest Beige Book look at the economy from the Fed. In the face of trying to recoup lost growth due to the pandemic and then hopefully getting on a path of robust expansion, it was reported that the economy "expanded at a modest pace in the final weeks of 2021."

While that's just a snapshot, we don't need these kinds of snapshots. We've had too many in recent years.

Among the problems or challenges cited among the contacts cited by the Fed were "ongoing supply chain disruptions and labor shortages," and "the rapid spread of the Omicron COVID-19 variant."

The report continued:

"Most Districts noted a sudden pull back in leisure travel, hotel occupancy and patronage at restaurants as the number of new cases rose in recent weeks. Although optimism remained high generally, several Districts cited reports from businesses that expectations for growth over the next several months cooled somewhat during the last few weeks."

As for rising prices impacting businesses, it was pointed out:

"Wholesale and materials prices contributed to pricing pressures across a wide range of industries, spanning service providers and goods producers. Many contacts attributed the high cost of inputs to ongoing supply chain disruptions. Some Districts reported that transportation bottlenecks had stabilized in recent weeks, though procurement costs remained elevated. Ongoing labor shortages and associated wage growth also added cost pressures to businesses."

Even given the variety of factors at work here in terms of both inflation and growth challenges, the policy responses remain clear. First, the Federal Reserve needs to make clear that monetary policy will be completely refocused on price stability, with the unprecedented loose money the Fed has been running for far too long (since the summer of 2008!) reined in.

Second, Congress and the Biden administration need to reverse course from their agenda of more taxes and increased regulation. Rather, policymaking must be focused on reducing tax and regulatory burdens on entrepreneurship, investment, business and work, thereby enhancing incentives for these vital sources of innovation, productivity, and economic growth.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.