Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 411

How long will the bad inflation news last?

Like other central banks, the US Federal Reserve has been complacent about inflation risks. The complacency was challenged by the 12 May announcement that the increase in the consumer price index was 4.2% in the year to April. Will US consumer inflation exceed 5% and, if so, when? And will the inflation increase prove temporary, persistent, or even permanent?

The next CPI release is on 10th June and will relate to May. In May 2020 the CPI fell by 0.1%. So an increase in May 2021 of 0.7% or more would take the annual rate to 5%. The average monthly increase in the CPI so far this year has been just above 0.6%, while business surveys indicate price-raising pressures are at their most intense for over a decade. Evidently, there is a possibility that the annual rate of consumer inflation will soon go above 5%.

As discussed in this video, the increases in the CPI were quite large in mid-2020, but then negligible (with an average monthly increase of half of 0.1%) in the last four months of the year. A good bet is that – if the annual rate does not exceed 5% next month – it will do so before the end of the year. (I discuss these developments in more detail in a recent article in The International Economy magazine).

In these e-mails the emphasis of the inflation discussion in 2020 and early 2021 was on asset price buoyancy and the remarkable surge in commodity prices from April 2020’s trough. But news is now emerging of big wage increases. McDonalds has raised pay by 10%, in order to recruit enough staff to deal with an anticipated boom in demand when lockdowns end. Meanwhile the Bank of America plans to add 25% to its minimum hourly wage between now and 2025. The labour market is tight. As the Covid-19 restrictions are relaxed and more people return to work, it will tighten further. Upward pressures on costs and prices will become even more general.

The Fed chair, Jay Powell, believes that it is his institution’s task to deliver ‘full employment’ and seems concerned that US employment is still several millions lower than in early 2020, ahead of the Covid-19 devastation. No one seems to have told him:

  • first, that the stability of the Great Moderation is often attributed to the argument that no long-run trade-off exists between unemployment and inflation, and,
  • second, that this argument leads to the prescription that central banks should concentrate on price stability.

Further, his research staff have evidently failed to explain to him that a monetary explanation of national income and the price level – in which inflation is determined mostly by the excess of money growth over the increase in real output – has a long and distinguished pedigree in macroeconomics.

Anyhow the answer to the question, “will the US inflation increase prove temporary, persistent or even permanent?”, depends on current and future rates of growth of the quantity of money, broadly defined. To recover the macroeconomic stability and negligible inflation of the 2010s, it is necessary for that rate of growth to be brought down to about 0.3% a month.

Two main difficulties need to be highlighted.

First, US banks are now keen to expand their profitable loan assets and to reduce the excessive ratio of unremunerative cash reserves to total assets. With M3 broad money at about $26,000 billion, increases in banks’ loan portfolios of $100-150 billion a month by themselves add about 0.5% to the quantity of money. (This assumes – perhaps wrongly in current circumstances – that banks finance the new loans by adding the same amount to their deposit liabilities. As just noted, they may reduce the ratio of cash to assets instead.)

Second, the Federal deficit is widely expected to reach $3,000 billion in the 2021 calendar year, or about $250 billion a month. Again, if that is financed to the extent of $100-150 billion a month from the banking system, the quantity of money rises by about 0.5%. On the face of it, US policymakers will not find it easy to restrain money growth to the low figures that are consistent with inflation of under 2%.

While the USA may have trouble over the next few years in dampening money growth and restoring low inflation/price stability, China is veering towards credit restriction. China has become far more authoritarian under Xi Jinping, while his Harvard-educated top economic adviser, Liu He, is reported to dislike excessive debt. In the three months to April, M3 went up by only 1.8% (or at an annualised growth rate of 7.6%). Annual money growth of little more than 5% would be the lowest since China’s opening to the world began after the death of Chairman Mao in 1976.

 

Professor Tim Congdon, CBE, is Chairman of the Institute of International Monetary Research at the University of Buckingham, England.

Professor Congdon is often regarded as the UK’s leading exponent of the quantity theory of money (or ‘monetarism’). He served as an adviser to the Conservative Government between 1992 and 1997 as a member of the Treasury Panel of Independent Forecasters. He has also authored many books and academic articles on monetarism.

 

  •   9 June 2021
  • 3
  •      
  •   

RELATED ARTICLES

I called inflation's rise and fall and here's what's next

6 key themes driving bond markets

Trump vs Powell: Who will blink first?

banner

Most viewed in recent weeks

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Australia has saved $4.5 trillion for retirement. Here's what matters more

Most Australians approaching retirement can tell you the exact dollar value of their super account. But success depends on more than a sizeable balance. Here's four key questions to ask yourself at the start of the financial year. 

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Latest Updates

Retirement

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Investing

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Shares

The role of shareholder yield in a portfolio

Investors may be overlooking a timeless source of returns in a volatile market. The companies that consistently generate and return cash to shareholders have often proved remarkably resilient through uncertainty.

Shares

Australian inflation still well above the RBA's target

The RBA has spent more than three decades pursuing its 2%-3% inflation target. But the numbers tell a far more complicated story than the headlines. The results may surprise both its strongest critics and most loyal defenders.

Retirement

Retirement in reality - 5 months in

Retirement planning doesn't end when work does. Five months in, Joanne reflects on retiring at a different time to your spouse, coping with setbacks and the importance of rest. Some lessons only become clear after the fact.

Latest from Morningstar

What 6 key market indicators are telling investors right now

Are markets still expensive? There are the seven key indicators every investor needs to know. From gold and equities to bonds, oil, bitcoin and the US dollar. The data reveals where opportunities and risks may lie for investors today.

Investing

Can you ride the AI bubble without overpaying?

AI may prove as transformative as the internet, but markets are behaving as if success is guaranteed. As capital races towards unprecedented levels, investors should ask whether enthusiasm is getting ahead of reality.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.