Noted Economist Predicts U.S. Inflation Will Be Tamed

US inflation remained stubbornly high in August, with prices increasing at an annual rate of 8.3%.

Photo Insert: Global inflationary surge is fueled by more than just domestic demand.

While this higher-than-expected increase has disappointed economists, US Federal Reserve Chair Jerome Powell’s commitment to raising interest rates – which he emphasized in his recent Jackson Hole speech – will surely dent US inflation by squeezing demand.

The prospect of imminent monetary tightening has strengthened the dollar, which has breached parity with the euro and reached a 20-year high against the yen, easing import-led inflation.

Yet, global inflationary surge is fueled by more than just domestic demand. Supply-chain disruptions related to China’s restrictive zero-COVID policy, the effects of the Russia-Ukraine war on food and fuel prices, and rising labor costs all play a part.

These supply-side factors largely fall outside of what the Fed can control. The US economy, however, is uniquely positioned to overcome this particular species of inflation, owing to its relative energy and food independence, an abundance of immigrant labor, strong production capacity, and access to the capital needed to maintain and increase domestic manufacturing.

The US is less affected by soaring energy prices because it is a net energy exporter. In 2021, US energy exports reached 25.2 quadrillion British thermal units (Btu), exceeding energy imports by about 3.8 quadrillion Btu.

And in the first half of 2022, it exported more liquefied natural gas (LNG) than any other country. In contrast, Europe imported roughly 58% of the energy it consumed in 2020. In fact, All 27 EU members have been net importers of energy since 2013.

Even as US wages have risen in recent months – unit labor costs jumped by 9.3% between the summer of 2021 and June 2022 – the US continues to attract and rely on immigrant labor flows, which dampens wage inflation.

Washington, DC-based Migration Policy Institute says 13.7% of the US population (or 44.9 million people) was foreign-born in 2019, compared to less than 10% during much of the second half of the 20th.

Since 2005, more than one million people per year, on average, have obtained US permanent resident status. A 2017 review of studies by the Cato Journal determined that, on average, a 10% increase in the number of immigrants is correlated with a 2% decrease in wages. Even if wages do not fall in the short term, higher immigration would likely increase the labor supply and reduce wage inflation over time.

Finally, the US accounts for 18% of global manufacturing capacity, making it the world’s second-largest manufacturer after China. Manufacturing accounts for $2.3 trillion of US GDP, employs 12 million people, and was recovering in the 10 years before the pandemic. McKinsey says, the US economy added 1.3 million manufacturing jobs between 2010 and 2019.

Due to the COVID-19 pandemic, global supply-chain disruptions have forced up import prices, as US households rely on imported consumer goods. Corporations will most likely continue to favor resilience over cost-cutting and diversification, meaning a pivot of manufacturing back to the US.

There are already signs that US inflation might be cooling. US import prices (which exclude tariffs) fell by 1.4% in July for the first time in seven months. Meanwhile, core inflation in goods and services (excluding food and energy) fell to 5.9% in July from a high of 6.5% in March, before rising again in August. While these price pressures are beyond the Fed’s control, the US has the tools to mitigate their impact.

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