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Opinion

Against the Tide: US economy: Chickens and eggs

Inflation is set to feed into the US economy, with destructive effects. But the beginning of the process won’t be the consumer slowdown that so many expect.

An economic recession in the US is drawing closer. Ironically, the main road to economic recession will be through higher inflation. Higher inflation will cause a growth slowdown and that slowdown will accelerate inflation, at least for a while – so which is the chicken and which is the egg?

The recession won’t come from a traditional, consumer-led slowdown, as some believe. Right now, US wage income is far too strong for the doughty US consumer to pack up. Personal income rose 6% year on year in the first quarter and 6.4% year on year in the second. Indeed, measured by taxes, personal income is up 12.6% year on year in the second quarter of 2006. These sorts of numbers don’t fall in line with recession or disinflation.

The US national income cake keeps expanding; the Chinese (and the Indians and others) make things ever cheaper for the consumer; and the consumer can still borrow ad infinitum at low interest rates to finance his spending spree. That is what has been happening up to now.

But there are reasons why this happy coincidence of events is coming to an end. The main one is inflation.

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