The lower income tax rates passed into law this past December seemed like a wonderful idea. Who can object to bonuses and higher take home pay?
The U.S. stock market indexes fell sharply today (Friday, February 2, 2018) as investors digested a stronger-than-expected jobs report that stoked inflation fears. “The details of this jobs report, especially the numbers behind the wage growth suggest that companies are competing for workers and the shortage of skilled workers is pushing up wages. The trend in inflation is ticking higher and the big question is whether the incoming Fed, which is more hawkish, will allow the economy run hotter in the short term or tighten aggressively,” said Quincy Krosby, chief market strategist, at Prudential Financial.
Investopedia: A government or economy often defines full employment as any rate of unemployment below a defined number. If, for example, a country sets full employment at a 5% unemployment rate, any level of unemployment below 5% is considered acceptable. Full employment, once attained, often results in an inflationary period. The inflation is a result of workers having more disposable income, which would drive prices upward.
The short term benefit of lower income tax rates are obvious. It results in a bigger paycheck for almost all workers. However, with America’s unemployment rate at 4.1% for the past four months and below 5% since November 2016 the shortage of workers along with lower corporate taxes could easily result in a horrible surge in inflation.
Many of us saw the consequences of high inflation. In 1974 and again 1979 to 1981 we experienced inflation as high as 14.7% in a single month. We spent using a credit card knowing that the repayment would be in cheap dollars. Buying a home meant paying an inflated interest rate on the mortgage. We refinanced when the rate fell.
I have read nothing about economist’s concerns of higher inflation. The Federal Reserve Board did not raise rates at last Wednesday’s meeting. They left its benchmark interest rate unchanged in a range of 1.25 percent to 1.5 percent, a relatively low level that the Fed said would help support continued job growth and stronger inflation.
Wow! Is the Fed correct or are stock market investors correct? When you are working you can demand a pay raise to compensate for inflation but if you are retired inflation can destroy your retirement plans. Roaring inflation will also destroy the party in power in Washington.
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