IE Business Daily Business news for the Inland Empire.
On this week’s episode of “Professionals of the Inland Empire,” also known as PIE, host John Tulac talks with Economist Jay Prag about Macroeconomic Dynamics, Energy Geopolitics, and Structural Economic Shifts.
Current inflationary pressures differ fundamentally from traditional, money-driven inflation resulting from excessive Federal Reserve money creation. Traditional monetary inflation occurs when the Federal Reserve injects surplus money into the economy, whereas the present economic environment is driven by a supply-side price spike initiated by global energy disruptions. As Milton Friedman defined it, inflation is everywhere a monetary phenomenon. Current price increases do not stem from excess circulating currency but from external cost-push factors.
The surge in crude oil prices, triggered by escalating conflict in the Middle East, cascades across multiple product categories and market sectors. Diesel fuel prices have approached $10 per gallon in regions such as California, while fuel is priced per liter in the United Kingdom. Because virtually all commercial goods rely on truck transport at some point in the supply chain, high diesel costs directly inflate retail prices across the broader economy. This energy price spike carries a temporary war premium that is self-limiting and expected to normalize once Middle East geopolitics stabilize, operating independently of Federal Reserve policy interventions.
Current elevated interest rates are detached from short-term inflation metrics and are driven by unprecedented private and public sector borrowing demands. Corporate borrowing has reached an all-time high, driven by massive investments required to build Artificial Intelligence (AI) infrastructure, data centers, and a broader economic restructuring. Simultaneously, federal government budget deficits have expanded to historical highs, generating massive public borrowing needs. When an economy undergoes a systemic expansion and borrowing cycle, market interest rates naturally rise due to capital demand. The Federal Reserve is not actively forcing interest rates upward; rather, it is following market-driven increases. Monetizing this debt to lower rates artificially would risk inducing genuine monetary inflation.
Cost-push pressures extend beyond petroleum into essential technology inputs, with computer memory and processing chips experiencing sharp price increases due to infrastructure expansion. Data centers and technology firms are facing escalating electricity costs, prompting technology companies to build direct power infrastructure, including restarting dormant nuclear reactors and constructing new nuclear facilities.
Gross Domestic Product (GDP) revisions for recent quarters demonstrate a solid upward trajectory, and the national unemployment rate maintains an extended streak below 5%. Despite elevated baseline costs, macroeconomic indicators show strong expansion rather than an impending recession. Personal experience from the stagflation era prior to 1977 illustrates distinct differences from current conditions. While contemporary core inflation and grocery costs create immediate consumer distress at the ballot box, the underlying fundamentals lack the systemic economic stagnation that characterized the 1970s.
Core inflation directly influences voter sentiment, as escalating everyday expenditures for food and fuel frequently dictate political outcomes regardless of broader macroeconomic growth. In upcoming midterm elections, political outcomes for the United States Senate and House of Representatives will hinge on consumer reaction to localized living expenses. Projections suggest the House of Representatives is highly vulnerable to political shifts, whereas specific Senate races may remain competitive due to individual candidate quality and state demographic nuances.
Formulating precise quantitative economic forecasts for 2026 was impossible due to volatile geopolitical energy shocks. However, macroeconomic forecasting for 2027 is viable as geopolitical conflict parameters stabilize and domestic political alignments clarify.
California voters face competing legal initiatives regarding wealth taxes and commercial regulation, specifically Propositions 40 and 42. Under California constitutional law, if two conflicting propositions pass simultaneously, the measure receiving the higher overall affirmative vote total completely negates the competing initiative. Proposition 42 leads in voter polling, offering a legislative mechanism to void Proposition 40.
For more details listen to the full episode on YouTube @ProfessionalsofInlandEmpire.
The PIE podcast aims to showcase Inland Empire professional talent, foster local economic development, and highlight the Provisors networking community.
