Is In-Flation Out?

 

Harsh reality for any president: anything that goes wrong during your tenure – even if it is global problem, the result of a problem created by your predecessor, not anything you can control or pain inflicted uniquely on those who are saddled with the burden of necessary or beneficial change – is completely and totally your fault. Conspiracy theories are the negative accelerant of blame on any president, even as any objective review of such theories proves conclusively that they are false, even dangerous. Also beware of major political opponents who manufacture new “problems,” ones that truly do not need fixing or are assiduously irrelevant and perhaps unconstitutional, that only they can solve. Issues that fall into these categories include the pandemic, the degradation of the environment, culture wars, lockdowns, vaccine mandates, the big “Biden stole the election” lie without any proof, deep state secret controls and, most recently, inflation.

OpEd contributor Michael Hiltzik examines “inflation” in his contribution to the November 28th Los Angeles Times, a problem that is haunting Biden’s presidency even though it is a global issue that cannot be stemmed by any one nation: “Inflation is commonly regarded as a ravager of family budgets, a destroyer of political fortunes and, at its most extreme, a trigger for the rise of fascism.

“The result, investor and economic commentator Zachary Karabell writes, is that ‘any hint of inflation triggers the equivalent of PTSD in the ranks of central banks, economists, policymakers and millions of middle-class wage earners.’…Yet that was not always so — indeed, it’s not invariably so even today.

“At the moment, we’re experiencing more than a mere hint of inflation. The Bureau of Labor Statistics reported that prices in October rose 6.2% over a year earlier, the largest 12-month increase in more than 30 years, or since November 1990. Core inflation — absent food and energy — rose 4.6% over the last 12 months, the largest such increase since August 1991…

“Not every consumer is affected by inflation in the same way; for some it’s even a blessing. It depends on what people treat as crucial purchases for the near term, on what they can defer or forgo entirely, and on the source of their income. If your wages are rising faster than the cost of your market basket, you may even regard inflation as your friend.

“The roots of inflation fear are embedded memories of hyperinflationary periods of the past. The German hyperinflation of the 1930s contributed to the rise of Hitler and ingrained a horror of inflation in German economic policy — and therefore European economic policy — ever since.

“More recently, there was the oil price-driven inflation of the 1970s and the ‘stagflation’ period in the U.S., in which high unemployment and high inflation went confoundingly hand in hand… The inflation of that era was quelled only after then-Federal Reserve Chairman Paul Volcker orchestrated a recession and allowed interest rates to rise as much as was necessary to reduce the money supply…

“The optimal inflation rate has been an enduring topic of debate among policymakers. From 2000 through the 2009 recession, the Federal Reserve’s target was 1.5%; since then it has been 2%... Economists place the causes of inflation into three main categories… ‘Demand-pull’ inflation comes from consumer spending in a growing economy, reflecting healthy consumer confidence and a willingness to borrow to finance consumption. ‘Cost-push’ inflation comes from shortages of raw materials, labor and merchandise that aren’t available or aren’t produced enough to meet demand. Finally, there is the expansion of the money supply — overexpansion, that is — resulting in more money sloshing around in the economy than can reasonably be spent on goods and services.

“These causes all affect wages. Traditionally, wages have risen at a rate of about 1% higher than the consumer price index, reflecting economic improvement. When wages rise faster than that, businesses will complain about labor costs; when they fall behind, workers will feel trapped in an economy that fails them.

“Today’s inflation environment bears all these features in one sense or another. Consumers have emerged from the long pandemic lockdowns in a mood to spend and travel; oil-producing countries have refused to increase output to meet resurgent demand, resulting in a sharp rise in the price of oil… The port logjam and production slowdowns in computer microprocessors have contributed to merchandise shortages, driving up prices of cars and appliances. Federal pandemic relief programs, including augmented unemployment benefits, put money in household budgets. Workers’ resistance to returning to lousy jobs has forced employers to raise wages.” 

Many of these variables will dissipate over time. Logjams and supply chain issues may take a while to stabilize, but eventually they will. As fossil fuel experts are telling us we should not expect massive new construction of refineries and drilling platforms, simultaneously demand for travel and home heating rebounded well beyond projections. It is an ugly and expensive transition. Still shuddering from earlier low-demand travel and gasoline demands because of the pandemic, which resulted in layoffs and losses of some employees to COVID, the supply chain remains underprepared for the explosive return of consumer demand. Further, Americans are deeply confused at why infrastructure costs might not be inflationary, because these taxpayers do not recognize the difference between an infrastructure investment (which has a rate of return) and simply budgetary costs (which do not).

However, as the Omicrom variant surges, there is still a big question mark as to whether this is an economic speed bump or a new longer-term economic challenge. How much should companies spend to meet consumer demand? The Dow dropped over 1,000 points for a time as experts expressed their fear of possible further COVID destabilization. Hiltzik asks: “So where do we go from here? Inflation fears have the capacity to affect policy in self-destructive ways by discouraging government investments with long-term anti-inflationary effects, such as improving the nation’s physical and human infrastructure through construction and assistance with childcare and education costs.

“If Republicans and conservative Democrats were really concerned about the impact of higher prices on ordinary Americans, they would vote to raise the federal minimum wage to $15 an hour instead of keeping it at $7.25, where it has been mired for more than 12 years during which consumer prices have risen a cumulative 28%. They would vote to make the child tax credit permanent, instead of settling for a single year’s extension.

“Economist Stephanie Kelton calls the economic gains resulting from the miraculous development of COVID-19 vaccines and generous pandemic relief spending ‘good problems to have.’ Allowing near-term inflation fears to undermine longer-term investments would be penny-wise and just plain foolish.” Still, unvaccinated and self-righteous skeptics/resistors just might draw our recovery well into the distant future… but they will still blame Biden for any negative results. The leg bone is connected to the hip bone… etc, etc. 

I’m Peter Dekom, and we have a confluence of variable impacting our cost of living… but not all of these rises are permanent or even necessarily bad… even as Joe Biden is blamed for any negative numbers no matter why they may occur.