Strong US Economic Growth Should Be Helpful to Everyone

The US economy has improved dramatically as shown by the first revision of GDP, which put growth at 4.2% in Q2 after a 2.1% contraction in Q1. Growth in Q3 probably will be good as well.  

Price pressures seem to be quite muted. Part of the reason for the slower price increases is the fact that employment is still quite weak and commodity prices are much lower. Record grain harvests in the US, China and the Ukraine are certain to push prices in general to even lower levels. The impact of those developments will be far-reaching.

For instance, the lower prices in corn should bring down the cost of ethanol, which in turn should bring down gasoline prices in the months ahead. That, in turn should help boost economic growth.  

Does this mean deflation is here? Probably not, because the economy is actually growing. The key player in this scenario continues to be the Fed, which has indicated that it will remain accommodative. To be sure, quantitative easing will come to an end soon. But that does not mean the Fed is about to tighten monetary policy. It is almost certain that any rate increases will have to wait until Q2 2015 at the earliest.

Many Fed members are worried about inflation and are pushing for a tightening of monetary policy now. Fortunately, Fed Chair Janet Yellen has a good head on her shoulders and seems to be unwilling to be pushed around. She wants to see employment be at a healthier level and income levels to improve.