The Federal Reserve’s Fight with Inflation Could Cool the Hot Labour Market, Risking Stagflation

• The Federal Reserve is hiking interest rates in an effort to defuse an explosive year of price inflation, but global forces could neutralize the effects of that tightening of monetary policy, and keep inflation high. 
• Some observers believe the U.S. government may have misread the looming threat of inflation. During the pandemic, Uncle Sam dispersed historic sums of cash to blunt widespread economic damage. Analysts say this stimulus produced strong household savings, and a boom in demand for durable goods followed. This surge in demand came as global supply chains stalled out, and a persistent bout of inflation followed. In March 2022, prices across all categories rose to historic levels, 8.5% year over year. 
• From 1965 to 1982, inflation soared, at times reaching double-digit rates. In 1979, the central bank, under Chair Paul Volcker, kicked off a tightening cycle that resulted in interest rates of nearly 20%. Strong monetary policies killed inflation, but also led companies to offshore labour costs. As a result, American workers saw their labour income stagnate relative to productivity for four decades. 
• This period in U.S. economic history is remembered for stagflation, which describes the dual threat of stagnant growth and persistent inflation. Today’s Federal Reserve leaders hope to avoid such a dramatic turn of events. But their plan could backfire, as many of the root causes of inflation are outside of the bank’s control.

(Source: CNBC News)