Ouch. If Americans expected inflation to peak in the summer, the US consumer price inflation report for August has dashed those hopes. But it’s going to be a double ouch for almost everyone who does not reside in the world’s biggest economy. That’s because the US Federal Reserve and its chair Jerome Powell will now feel justified in taking even bigger steps with interest rates to tamp down inflation.
Unfortunately, the cure may be worse than the ailment. If the Fed does raise rates with a vengeance, the effects will be felt outside of its national purview: Parts of the global economy will break. The worldwide downturn will in turn blow back onto US growth. We will then be headlong into the realm of unintended consequences.