“ Getting inflation down to 2% will prove challenging — at least without the Fed tightening monetary policy enough to instigate higher unemployment. ”
To finance federal incentives and more health-care spending, the federal deficit for the fiscal year ending in September will likely hit $1.85 trillion. That’s 6.9% of GDP and well-above the average for advanced industrialized economies. Although the structural constraints on supply that were imposed by COVID — in particular, the COVID shutdown of the Chinese economy and West Coast port backups — have passed, other unforeseen problems have emerged.
Near term, the resulting Chinese factory deflation and a weakening yuan exchange rate reduce prices for products from China. But as sources of supply rearrange in Asia and some production is reshored or moved to Mexico, higher labor costs will put upward pressure on prices.
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