Fed raises rates by 75 basis points. Here comes stagflation.

High inflation coupled with a recession is called stagflation.

After more than a year of delay, the Federal Reserve finally looks like it is serious about reducing inflation. The meager 25 basis point increase in April and the 50 basis point increase in May were much too small and much too late. Look for larger and more frequent rate increases before year-end.

The best measure of inflation at the consumer level is the Consumer Price Index (CPI). The CPI has increased by 8.6% in the last 12 months. That is the highest inflation rate since 1981. Unfortunately, the CPI will increase in the coming months as energy, food and commodity prices continue to rise. Business will also see rising wage rates for their workers.

By late summer we could see the CPI approach double digits. At the same time, the economy has stalled. Growth in the first quarter of this year was -1.5%. If that negative growth continues into the second quarter, that would mean the economy has experienced two successive quarters of negative growth in GDP which is the classic definition of a recession.

High inflation with a stagnant or shrinking economy is called stagflation. That’s a problem we haven’t seen since the late 1970s. The real problem is that getting rid of stagflation is very difficult and…