1. United States
2. Fla.
3. Letter

Inflation is doing damage to older voters! Why are rates spiking, and what does their rise portend? Interest rates are up because inflation, which was declining until Trump returned to office, has surged again: Investors are responding to the fact that the current rise in inflation looks a lot like the rise in inflation during 2021-2023, which was the result of supply chain disruptions. Back then the Federal Reserve was compelled to raise short-term interest rates to curb inflation. Longer-term interest rates, which largely reflect expected future short-term rates, followed suit. Now we’re seeing a remake of that movie, with one big plot difference. The inflation spike of 2021-22 was overwhelmingly the result of factors outside Joe Biden’s control — surging demand as the world recovered from Covid and Vladimir Putin’s invasion of Ukraine. The current inflation surge, by contrast, is all Trump, caused by his self-defeating tariffs and the gratuitous debacle in Iran. And the inflation outlook is worsening by the day as the Strait of Hormuz, through which about 20 percent of the world’s supply of oil normally passes, remains closed. Until now, markets have been complacent about the implications of the Iran war. Investors have allowed themselves to be lulled by Trump’s repeated assurances that either victory or a negotiated settlement were just around the corner. But they are now waking up to the reality of the debacle. And their awakening has transformed expectations about future monetary policy. On the eve of the bombing, markets were virtually certain that the Fed would cut short-term rates by December. Now they’re virtually certain that rates will either rise or at best stay the same. Not a good job!