[CliffFletcher]

The Economist doesn’t think U.S. inflation is transitory - rather, the economy is overheating, and the interest hikes will need to keep coming.

The perils of wishful thinking

To fix America’s inflation problem, the Federal Reserve must go big

… Strip out volatile food and energy prices, though, and underlying “core” inflation is still roaring. Prices rose at an annualised rate of 7.4% in August, exceeding economists’ forecasts and well above the Fed’s target for overall inflation of 2%. It is tempting to sift through the components of the inflation basket in an endeavour to find signs of cooling. At one point inflation was driven by stratospheric prices for second-hand cars and gummed-up supply chains, as locked-down Americans splurged on goods. These pressures have since eased. The increases today reflect a surge in the prices of some services, such as housing, which could eventually slow down, too.

Yet when underlying inflation has been this high for this long the simplest explanation is the most obvious, no matter what happens to individual components: the economy is still overheating. The effects of generous fiscal stimulus, which stoked demand during the pandemic, linger today. According to Goldman Sachs, a bank, households in aggregate are still sitting on more than $2trn in excess savings accumulated during lockdowns, equivalent to 10% of annual gdp.

A tight labour market is buoying demand still further. At 3.7% the jobless rate remains remarkably low; there are still around two vacancies for every unemployed person. The severe shortage of workers has led to heady wage growth, which in turn has sustained consumer spending. By one gauge, median earnings in America are rising by 7% at an annualised rate, a pace not seen in at least the past two decades. Whereas inflation in Europe should plunge as the energy shock fades, American inflation, rooted as it is in home-grown demand, is far stickier...