Driving down America’s consolidating core inflation in the runup to an election year is a no-win scenario. That’s the story the gullible politicians don’t want to hear.

But they will have to, because there is no way of escaping a growth recession after decades of unbalanced monetary, fiscal and foreign trade policies that led to high inflation, calamitous public finances and $16.7 trillion – and counting -- of net external liabilities.

As always, recession fears are fed by difficulties of stopping, and reversing, accelerating costs and prices in labor and product markets.

In the U.S. case those difficulties have become more serious due to much delayed and inadequate decisions to narrow the economy’s widening demand-supply gap, and to prevent externally induced food and energy supply shortages.

There is no hindsight bias here. Attempting to justify their inaction, the U.S. – and the European -- monetary authorities ignored a surging inflation, arguing, against all the evidence and empirical research, that this was a “temporary and reversible phenomenon.”

High inflation cannot be tolerated

That was a surprising policy mistake by central banks whose highly professional technical staff knows better. But it’s now irrelevant to invoke more plausible reasons that have led to hugely embarrassing, costly and unsanctioned policy errors.

Yes, economic activity and employment are slowing down, inflation remains high and asset prices are falling because financial markets realize that interest rates will continue to rise – and to stay high – to weaken demand and bring the prices down.

That process is already under way, because a pronounced weakness of U.S. aggregate demand began in the second half of last year. During that period, the GDP growth slowed down to an annual (not annualized) rate of 1.5% from nearly 3% in the first half of 2022.

Even the traditionally strong growth of household consumption was halved in the last two quarters when most retail outlets transact 75% of their annual sales. And residential investments – always a steady support to consumer durables sales (big ticket items) -- literally collapsed at an annual rate of 27%.

What can turn that around in the months ahead? The answer is: nothing.

Real private disposable incomes declined last year at an annual rate of 6.4%, the 30-year fixed mortgage rate of 6.85% soared 18 basis points over the last week, and the actual unemployment rate now stands at 9.1% -- a far cry from the officially reported 3.4% if one adds involuntary part-time workers (4.1 million) and people who dropped out of the labor force (5.3 million) after unsuccessfully looking for a job.

So, variables driving three-quarters of American GDP (household income, cost of credit and employment) have all turned negative. And they will get worse as interest rates continue to rise, and the lagged impact of previous rate hikes begins to hit demand and output.

Try peace and more food and energy

One should also note that U.S. households have been drawing down their savings to maintain their customary lifestyles. That has brought the savings rate to a historically low 3.3% last year from 12% in 2021. For most people, that’s the end of the shopping trail.

Will exports help?

Exports to where? America’s largest export markets are Europe, Canada and Mexico. They account for nearly 60% of total U.S. sales abroad. All those markets are shrinking as interest rates are pulled up to fight rising inflation.

The E.U. growth in the second half of last year slowed down to 2.2%, with economic activity in France and Germany stagnating to an annual rate of about 1%. The euro area policy interest rate now stands at 3.5% for a headline inflation of 8.5% and a core rate of 7%. Those hugely negative real interest rates of -5% must turn positive before any meaningful inflation slowdown. And that means a further decline of demand and output.

Economies in Canada and Mexico are also experiencing a weakening growth as a result of rising credit costs to bring their respective 7% and 8% price inflations down.

The bottom line for the U.S. is an invasion of European and North American goods and services as producers in those regions step up exports to the U.S. to escape deteriorating domestic demand at home.

What could help the U.S. economy here?

A peace in a permanently troubled Europe, and a restoration of energy and food supplies to fight inflation. Some oxygen would be given to suffocating European economies which take a quarter of American exports. That would also diminish the Europeans’ urge to dump on U.S. markets and would relieve pressure on American import-competing industries.

Not a mean feat in the runup to next year’s difficult elections.