America’s economy needs tighter monetary policy

THE FEDERAL RESERVE has spent most of 2021 saying that high inflation would be temporary. And yet price rises have persistently overshot forecasts, reaching 5% in October, on the Fed’s preferred measure, even as employment remains about 4m short of its pre-pandemic level. On December 15th the Fed will decide whether to tighten monetary policy, probably by accelerating the pace at which it “tapers” its monthly purchases of assets, mostly government bonds, which are currently running at $90bn per month. It should go ahead and take action. Though uncertainty is high, the Fed must rapidly respond to the data it has today and then adjust as necessary as conditions evolve. Those data indicate that it has already fallen behind.

The rise in prices cannot be explained by a few shortages, such as of second-hand cars. In October the median item in the consumer-price index was 3.1% more expensive than a year earlier. Clothes prices were up 4.3%, shelter (such as rent) was 3.5% dearer, and transport cost 4.5% more. In the third quarter private-sector wages and salaries grew at an annualised rate of 6.5%—too fast to be compatible with the Fed’s 2% inflation target without incredible productivity growth.