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Feb. 17, 2017, 12:46 p.m. EST

Why inflation threatens the middle class

Growth is too slow to bring higher wages, but costs for everything are rising fast

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By Peter Morici

The consumer price index is up 2.5% over the past 12 months, the highest inflation rate in four years.

Buffeted by slow growth and too few decent paying jobs, Americans now have to deal with more inflation.

In January, consumer prices rose 0.6%. Although that was driven by a surge in energy prices not likely to repeat, core inflation — prices less food and energy — has been greater than the Fed’s target of 2% for the last year.

Yet, economic growth is not likely to accelerate enough to support wages that rise as fast as prices going forward.

Donald Trump’s promised tax cuts and reforms, infrastructure and deregulation initiatives are likely to face a host of obstacles. Those include congressional Republican opposition to further increasing the budget deficit, opposition from adversely affected parties like Wal-Mart /quotes/zigman/245476/composite WMT -2.16%   and other retailers regarding border tax adjustments, and legal challenges to executive orders — for example, easing labor market and financial regulations.

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The Federal Reserve will be faced with an uncomfortable choice — raise rates too quickly to combat inflation or continue printing more money in hopes of further supporting economic growth.

Here are four things to know about higher inflation.

1. More Money Won’t Boost Growth

Much of what caused the financial crisis and slow growth has not been fixed. Big banks are still too big to fail and without a structural solution — namely breaking up the largest institutions and reinstating Glass-Steagall — deregulation or simply lax enforcement of existing rules by former Wall Street executives, who made fortunes making deals and trading, poses new risks.

Subsidized Chinese products are still flooding U.S. markets, destroying good-paying manufacturing jobs, and Trump is backing off his campaign promise to directly challenge Chinese protectionism.

Similarly, oil prices  are up enough to soon increase U.S. shale production to 2015 levels — drilling activity has risen significantly since May. However, Trump will face considerable political opposition and years of legal challenges if he tries to boost drilling activity in the Gulf and elsewhere offshore. That will leave the United States dependent on imported oil, and send consumer dollars abroad instead of creating jobs here.

Absent fixes for those problems — and promised tax cuts — the Fed going slow on interest-rate increases will enable more inflation but won’t do much to boost growth.

2. Easy Money and High Inflation Steals from the Elderly

Easy money pushes down rates on CDs where many retired Americans park savings to supplement Social Security and pensions.

Even with the Federal Reserve pushing up the fed funds rate 0.5 to 0.75 percentage points this year, the rush of foreign capital into U.S. markets will likely keep long rates low, as it did when Ben Bernanke pushed up short rates in 2004-2006.

/quotes/zigman/245476/composite
US : U.S.: NYSE
$ 97.47
-2.15 -2.16%
Volume: 22.71M
Nov. 17, 2017 4:00p
P/E Ratio
23.43
Dividend Yield
2.09%
Market Cap
$297.59 billion
Rev. per Employee
$213,011
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