Recent public statements of the U.S. Federal Reserve (Fed) that labor market indicators will play a prominent role in its future policy settings are nothing new. By its charter, the Fed is bound to aim at “maximum employment” and “stable prices.”

Practical and doctrinal issues with this policy mandate are still hotly debated.

Starting with the obvious, it is unclear what is meant by “maximum employment” and “stable prices.”

More importantly, economic research still maintains that there is an inverse relationship between those two policy objectives – a sort of mission impossible without a stable trade-off.

Apart from that, there is an arcane mouthful where a full employment unemployment rate is the one that causes no accelerating inflation (i.e., “a non-accelerating inflation unemployment rate”).

By contrast, a consensus exists to define price stability as an inflation rate between 0% and 2%. The problem, however, is the choice of the inflation variable that should serve as an indicator of price stability. That is particularly the case in the U.S., where a widely used consumer price index (CPI) has been supplanted by several versions of an esoteric personal consumption expenditure index (PCEI).

U.S. inflation is out of control

Doctrinal problems are much simpler. The monetary theorists believe – and I share that view – that the monetary policy cannot be held responsible for full employment and price stability.  Price inflation is a monetary phenomenon. It is, therefore, the only economic variable that the monetary policy can, and should, control. Labor market conditions are part of the real economy that should be managed by fiscal and structural policies.

With those preliminary clarifications out of the way, we can now turn to practical problems facing the American monetary authorities.

At the moment, a wide range of inflation numbers clearly shows that the U.S. price stability is out of control. The corollary is that, given the unfolding business cycle dynamics, inflation will get much worse in the months (and possibly years?) ahead.

Consumer prices, for example, shot up to an annual rate of 5% last month from only 1.4% in January. Over the same period, producer prices, indicators of what’s coming up at the retail level, accelerated from 1.6% to 6.6%.

And, then, unit labor costs (labor compensation minus labor productivity) in the first quarter rose 4.1% from the same period of last year, maintaining the same upward trend observed in 2020. That is the variable eroding profit margins and prompting businesses to raise prices in an environment of growing demand and employment, as is the case now.

That brings us to the surging PCEI -- the Fed’s inflation target. Last month, measures of that carefully cherry-picked variable moved toward an annual rate of 3.4% to 3.9%, double the upper end of its 0% to 2% policy range, and nearly a fourfold increase from the beginning of the year.

Looking at this sort of evidence, how credible is the official assurance that the U.S. inflation is a “transitory” problem – in the sense that the rate of price increases will slow down in the coming months toward the price stability range?

The answer is simple: A significant probability of such an event happening would only be plausible in case of an unfolding slowdown of economic growth, with ensuing recession and rising unemployment.

Stumbling from crisis to crisis since 2008

But we are now seeing exactly the opposite. The U.S. economy is now experiencing a strong cyclical upswing with rising capacity pressures in labor and product markets.

The latest and the most comprehensive business surveys show a booming economy, with falling inventories, rising order backlogs, slowing supplier deliveries, labor shortages and soaring prices for 47 consecutive months.

Briefly put, we are looking at an economy on a sharply accelerating growth path of about 7% -- more than three times above the limits to noninflationary growth set by the current stock and quality of America’s human and physical capital.

Trying to minimize and mystify America’s current inflation outlook is a dangerously unwise policy for an administration looking for credibility and a hold on legislative power. All 435 seats in the House of Representatives and 34 Senate seats will be contested in Congressional elections on November 8, 2022.

By that time, bursting inflation, falling households’ real incomes, asset price losses and a slowing growth morphing into an irretrievable tailspin won’t be the hallmarks of an election winning scenario.

America’s economic problems are deeply ingrained structural flaws caused by decades of neglect and election cycle quick fixes. Hence the stranglehold of supply bottlenecks we now see in business surveys.

Apart from stoking inflation, whipping up demand pressures with loose monetary and fiscal policies under conditions of binding supply constraints leads to soaring imports of foreign goods and services. And that’s exactly what we got with surging trade deficits, excessive foreign debt and huge wealth transfers to systematic trade surplus runners and strategic adversaries.

The years of Fed’s monumental policy errors ended up with a 2008 financial crisis, followed by the Great Recession. Since then, the Fed has continued to stumble deeper and deeper into an unending cycle of monetary mismanagement. That’s a sad coda to an opportunity to lead to a stable world economy.