America’s economy is on the rise, with factories working at full capacity, demand for goods and services remaining strong, and prices steadily increasing. This is a clear indication of a robust economy that is showing no signs of slowing down. However, the Federal Reserve’s “lag theory” on inflation seems to be at odds with this reality.
The Fed’s “lag theory” suggests that inflation is a result of a lag in the response of prices to changes in the money supply. In other words, when the Fed increases the money supply, it takes time for prices to catch up and reflect the increase. This theory has been the basis for the Fed’s monetary policy for decades, but it seems to be failing in the current economic climate.
One of the key indicators of a strong economy is the Purchasing Managers’ Index (PMI). This index measures the economic health of the manufacturing sector by surveying purchasing managers on their production levels, new orders, and inventory levels. A PMI reading above 50 indicates expansion in the manufacturing sector, while a reading below 50 indicates contraction.
According to the latest PMI data, the US manufacturing sector is booming, with a reading of 60.8 in April, the highest level since 1983. This is a clear indication that factories are operating at full capacity and demand for goods is strong. This is in stark contrast to the Fed’s “lag theory” which suggests that inflation should be low in an economy that is not operating at full capacity.
But the reality is that prices are on the rise. The Producer Price Index (PPI), which measures the average change in prices received by domestic producers, increased by 1% in March, the largest increase since 2012. This was driven by a surge in energy prices and an increase in the cost of raw materials. This is another clear indication that inflation is on the rise, despite the Fed’s theory.
So why is the Fed’s “lag theory” failing? The answer lies in the current economic landscape. The pandemic has disrupted global supply chains, causing shortages and bottlenecks in various industries. This has resulted in higher prices for goods and services. Additionally, the unprecedented fiscal and monetary stimulus injected into the economy has also contributed to rising prices.
Moreover, businesses are also taking precautionary measures by building up their inventories. This is a sign of confidence in the economy and a way to hedge against potential future disruptions. However, it also adds to the upward pressure on prices.
In summary, the Fed’s “lag theory” is not able to explain the current state of the economy. The strong PMI data and rising prices are a clear indication that inflation is not lagging behind the increase in the money supply, as the theory suggests. Instead, it seems that the Fed’s theory is being overshadowed by the reality of a booming economy.
In conclusion, America’s factories are humming, demand is solid, and prices are rising, all pointing towards a strong and growing economy. The Fed’s “lag theory” may have been a useful tool in the past, but it seems to be out of touch with the current economic climate. As businesses continue to thrive and the economy continues to grow, it is time for the Fed to re-evaluate its theories and adapt to the changing times.
