CPI Hits 3.4% as Congress Ignores Fiscal Deficit

The Consumer Price Index rose by 0.4% last month. Annual inflation now stands at 3.4%. This figure exceeds the Federal Reserve target of 2%. The midterm elections occur in seven weeks. Voters dislike high prices. They also dislike the required policy response.

The Federal Reserve raised interest rates by 0.25%. The new range is 3.75% to 4.0%. New Fed Chairman Kevin Warsh maintains the 2% inflation target. He acts as the sole actor in the fight against price increases. This view is incorrect. Fiscal policy must stabilize the debt.

Real wages fell for 43% of workers

A National Bureau of Economic Research study analyzed 16 million workers. It covered the period from 2021 to 2024. Inflation peaked at 9% in 2022. Firms gave standard 3% cost-of-living raises. Forty-three percent of workers who stayed at their jobs lost purchasing power. Thirty-seven percent of all studied workers saw real wage cuts. Most of these cuts were severe.

Aggregate real wages have recovered since the peak. The ground lost during the interim was never regained. Oil and gas prices added to the monthly increase. Geopolitical tensions in Iran contributed to this rise. The broad trend remains unfavorable for consumers.

Fiscal deficits fuel the inflation cycle

Higher interest rates increase government debt service costs. This requires more borrowing. It creates claims on future tax revenue. This dynamic can add fuel to inflation. Parker Sheppard of the Fiscal Lab outlines a solution. Congress must commit to a credible deficit target.

Current deficits run at 6% of GDP. Congress has historically hit levels near 3%. Sheppard argues for halving the deficit. The Congressional Budget Office should include debt-service costs in legislation scores. This approach was used in the 1980s. Markets then believed a fiscal correction was coming.

Volcker precedent demands fiscal responsibility

Paul Volcker could not defeat inflation alone. The Reagan administration ran larger deficits in the early 1980s. Yet markets accepted the disinflation path. Congress passed the Tax Equity and Fiscal Responsibility Act in 1982. Social Security reform followed in 1983. Tax reform arrived in 1986.

These actions enabled the surpluses of the late 1990s. That lesson has been forgotten. The current administration acts as if the Fed handles all inflation risks. This is a dangerous assumption. Lawmakers must show they will back the debt with future surpluses. The report from GN markets/inflation (en-US) highlights this gap. Inflation is a shared political failure.