Consumption is rising again in the US, and inflation is in an ambush

Optimism appears to be picking up in the US, where consumer spending rose in January, as President Joe Biden doubled down on efforts to get approval for a $ 1.9 trillion bailout, raising fears of economic overheating.

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US consumer spending in January was 5.3% higher than December, and 7.4% higher than January 2020, according to data released by the Commerce Department on Wednesday.

This increase is the first after three months of decline.

“The only rational explanation (…) is that the second round of stimulus measures reached their target and were spent almost immediately,” said economist Joel Naroff in a note.

American households’ bank accounts have already been rescued slightly by the $ 900 billion stimulus plan approved by Congress at the end of December and ratified by Donald Trump, after months of negotiations.

The $ 600 per person checks and extended unemployment benefit enabled them to purchase electronics, furniture, household items, books, musical instruments, sports and entertainment items.

Even bars and restaurants, hard hit by the crisis, saw an increase in their sales for the first time since September.

Too much or too little

For President Joe Biden, we must now do more, and help the world’s leading economy extricate itself from this unprecedented crisis.

He is advocating for a fresh injection of public money, and has been defending the $ 1900 billion bailout for a month.

The envelope provides acceleration of vaccinations against Covid-19, reopening of schools, and assistance to businesses and families in difficulty, as well as for cities and states in the country so that they do not have to fire firefighters, police officers and teachers. .

The Biden administration believes it is better to do more than not enough, with the support of some economists who consider this assistance to be especially essential in the face of unemployment that still affects more than 20 million people.

But others fear escaping the sharp rise in prices, such as Larry Summers, former Treasury Secretary to Bill Clinton and chief economic advisor to Barack Obama, who feared “inflationary pressures unheard of for a generation.”

The question is above all whether this price increase will be permanent or only temporary – linked in particular to the effect of the comparison with the low prices of Spring 2020 and the escape after a year of restrictions.

An unprecedented jump in producer prices

Members of the US Central Bank’s monetary committee, who closely monitor price development to establish their monetary policy, were heading for temporary inflation, according to the minutes of their January meeting, which was published on Wednesday.

“Several participants (at the meeting) stressed the importance of distinguishing between one-off changes in prices and changes in the basic direction of inflation,” this report details.

Thus, according to them, “changes in relative prices could temporarily increase measured inflation, but perhaps not have a lasting effect.”

The Fed has insisted that it will keep rates very low to support the economy until full employment returns and will continue to flood markets with liquidity by purchasing monthly assets to the tune of $ 120 billion. Rather, it is ready to accept that inflation temporarily above its 2% target.

Prices rose 1.3% in 2020 in the US alone.

The producer price index, that is, the prices paid by manufacturers, increased by 1.3% in January, marking the largest increase since the index began monitoring in December 2009. Prices of services led the increase.

“The pressure on prices is unlikely to continue, given the economy’s surplus capacity,” says Rubella Farooqui, an economist at HFE.

Maher Rashid from Oxford Economics believes that “this recovery reflects a recovery in demand and pressure related to bottlenecks which should stabilize in the coming months.”

The bond market has sounded a wake-up call since Tuesday, with interest rates on the 10-year Treasury hitting their highest levels in nearly a year.

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