This article is written by Peter Morici, an honorary business professor at the University of Maryland.

The Federal Reserve should exercise caution with inflation. In September, the year-on-year growth rate of the US Consumer Price Index (CPI) dropped to 2.4%, but the core inflation excluding food and energy remained as high as 3.3%. Prices of necessities such as medical care, autos, and homeowner insurance continue to rise rapidly. The decline in oil prices has slowed overall inflation, but this could easily reverse.

In September, non-energy goods in the US only reduced CPI by 0.2%, while non-energy services, accounting for 61.3% of CPI, increased by 4.7%—housing costs rose by 4.9%, and other non-energy services increased by 4.3%.

There are four points worth mentioning:

First, price increases have a lasting impact on consumer psychology. Surveys by the New York Fed, the Business Roundtable, and the University of Michigan on future year inflation expectations show that the US average annual inflation rate expectation exceeds 3%, consistent with core inflation being above the Federal Reserve's 2% target. Expectations will affect the positions of unions and individual workers in wage negotiations and business planning. For example, Boeing workers are demanding wage increases from the company.

Second, federal decision-makers should acknowledge mistakes, or they may repeat them and fail to receive credit for their success. For instance, the Trump and Biden administrations collectively spent $4.5 trillion on relief during the COVID-19 pandemic, while the Federal Reserve also purchased a similar amount of bonds and other securities, significantly expanding the US money supply.

For instance, the Trump and Biden administrations collectively spent $4.5 trillion on relief during the COVID-19 pandemic, while the Federal Reserve also purchased a similar amount of bonds and other securities, significantly expanding the US money supply.

These measures have boosted consumer demand, pushing overall inflation to 9.1% in June 2022. Relief measures during the pandemic were too generous, and when lockdowns were lifted, the slow return of workers to their jobs prolonged the upward pressure on wages and prices.

The Biden administration not only failed to acknowledge the overspending, but further increased the federal deficit through the Chip and Science Act and the Inflation Reduction Act. This year, the federal budget deficit accounts for 7% of the GDP, compared to 4.6% before the COVID-19 pandemic.

With increased corporate investments in the field of artificial intelligence, additional private investments and federal debt will compete for new savings in the financial markets. Either the Fed allows interest rates far higher than pre-pandemic levels, or we will face more inflation.

US Vice President and Democratic presidential candidate Harris partly attributes inflation to landlords using algorithms to set rents and price manipulation by supermarket chains. However, many economists have found that supermarket profit margins have not increased and are unrelated to recent food price hikes. The New York Fed found that grocery prices are mainly driven by wage increases and fluctuating commodity prices.

Supporting the ban on algorithmic pricing and accusing companies' practices may score well among progressive voters, but limits Harris's appeal to moderate and swing voters. Algorithmic pricing is common—think of airlines and US railroads. Prohibiting this practice may reduce efficiency in adjusting prices for allocation shortages during peak demand periods and reduce discounts when seats are available, limiting opportunities for low-income passengers.

Today, the US GDP has returned to pre-pandemic trend forecasts, and the economy continues to robustly increase employment. In swing states, the unemployment rate is generally lower than pre-pandemic levels. However, the Biden administration's performance in handling the economy has been poor, and Harris has faced difficulties competing with Republican presidential candidate Trump in swing states.

Third, economics inevitably succumbs to political agendas. An industry has emerged aimed at discrediting 'neoliberal economics' and giving credibility to new monetary theories, believing that large deficits funded by printing money can support generous social projects.

Research from the Brookings Institution attempts to attribute America's higher inflation to supply chain shortages, 'especially the rise in corporate profit margins'—rather than excessive pandemic relief policies.

When supply is constrained, profit margins will increase. However, many companies producing non-essential goods, such as Ikea and Nike, are now facing pressure to lower prices.

To avoid the long-term trade-off between high interest rates and inflation, the federal government must either cut welfare programs that account for over 60% of its spending, or implement taxes similar to those in Europe.

Fourthly, economic growth under moderate inflation is beneficial for the stock market. The 25 years leading up to the global financial crisis was a period of rising CPI inflation, averaging 3.1%. During this period, the S&P 500 Index increased by an average of 13.7% per year.

Over the past two years, inflation has averaged 3.1%, while stock prices have grown at a rate of over 20% per year. Stock returns may slow down in the future, but economic growth and profits are crucial for maintaining upward stock prices.

Editor/ping