Highlight of the Week
U.K Inflation Tops 10%
- The U.K.’s annual rate of inflation increased to double digits and is set to rise higher by year-end. Energy prices have continued to accelerate across Europe as Russia withholds supplies of natural gas. It is the highest rate of inflation the U.K has seen in four decades.
- The U.K. will suffer a particularly severe surge in prices in part because of the 2016 decision to leave the European union. Brexit caused costs for importers to increase and reduced the ability to hire foreign workers in lower-paid service industries.
United States Labor Shortage Poses Challenge for the Economy
- The labor force is about 600,000 smaller than in early 2020, pre-covid. The number of workers has fallen since March by 400,000, according to data from the Labor Department. Lastly, the labor-force participation rate is at 62.1%, which is significantly lower than the pre-pandemic rate of 63.4%. The stalled labor-supply is a concern because it increases the risk of a ‘more-damaging’ recession.
- The Federal Reserve hopes to bring inflation back down to its 2% goal, but typically achieving this goal requires an increase in unemployment. Since job openings are unusually high, it is unlikely we will see an increase in unemployment to cool inflation. More importantly, the stagnant labor supply is cause for long-term concern. The limited supply of workers will constrain the economy’s growth potential in the long-term.
Biden Signs Inflation Reduction Act, Which Sets a Minimum Corporate Tax Rate of 15%
- The new law includes a $369 billion investment in climate and energy policies, $64 billion to extend a policy under the Affordable Care Act to reduce health insurance costs, and a 15% corporate minimum tax aimed at companies that earn more than $1 billion a year.
- The $437 billion spending package is expected to raise $737 billion in revenue over the next decade, with the biggest share coming from reductions in drug prices for Medicare recipients and tax hikes on corporations. President Biden’s team is projecting that the Act will reduce the deficit by more than $300 billion over a decade.