Why US Inflation Is Headed Down

NEW YORK – US inflation remained stubbornly high in August, with prices increasing at an annual rate of 8.3%. While this higher-than-expected increase has disappointed some 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. And the prospect of imminent monetary tightening has helped to strengthen the dollar, which has breached parity with the euro and reached a 20-year high against the yen, easing import-led inflation.

But today’s 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, abundance of immigrant labor, strong production capacity, and access to the capital needed to maintain and increase domestic manufacturing.

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