Don’t overlook the issue of inflation


Inflation surged, casting a shadow over the otherwise welcome post-pandemic economic boom. No matter which price measure you prefer, all of them have accelerated: consumer and producer prices, raw materials, and the price deflators used in the Department of Commerce’s national income accounts. So far, officials in Washington have insisted there is no cause for concern, claiming the phenomenon is “transient.” They may be right, but in the wake of an endless flow of liquidity provided by the Federal Reserve (Fed) and measures to rapidly increase the money supply, as well as clear evidence that the acceleration of the inflation has surprised Washington experts, many are quite reasonably reluctant to ignore the numbers. If inflation sets in, it could destroy the financial stocks and wealth of millions of Americans.

All recent price measures are a cause for concern, if not outright fear. The Ministry of Labor’s consumer price index has grown at an annual rate of 7.3% so far this year, up from 0.2% in 2020 and an average annual rate of 1.5% for the five previous years, 2015-2019. Producer prices, what the Ministry of Labor called wholesale prices, have increased by more than 10% a year so far this year, up from 0.5% in 2020 and an average annual rate of increase of 0.2% between 2015 and 2019. The price deflator for the consumer part of gross domestic product (GDP), the Fed’s preferred inflation indicator, increased at an annual rate of 5.4% until present this year, up from 1.4% in 2020 and an average annual rate of 1.3% between 2015 and 2019. Oil prices have reached levels seen only briefly in the past five years. Metal prices are also rising sharply, as supermarket chains are building up additional stocks to keep pace with rapidly rising food prices.

This news would be worrying enough in itself, but underlying it is a plausible cause in the accommodative monetary policies followed by the Fed for years. With the exception of relatively minor adjustments along the way, the Fed has kept interest rates extremely low and pumped money into financial markets, since the 2008-09 financial crisis in fact. Monetary policies of this type are widely recognized as the cause of the great inflations of the 1970s and 1980s. Many over the past 10 to 12 years have expressed concern about the inflationary potential implicit in the Fed’s policies, but it has been easy to dismiss them. On the one hand, there was no sign of inflation, as is the case today. On the other hand, the money supply, the crucial link between policy and inflation, has not grown particularly fast. But now things are different. As should be obvious, inflation has accelerated, while money growth has exploded. The broad monetary measure M2, for example, has grown at an annual rate of 22.2% over the past 17 months, well above the annual growth rate of 5.6% on average between 2015 and 2019. .

In this context, it has indeed become difficult to accept the easy and sometimes casual dismissals issued by Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen. Certainly, these and other officials in Washington are pointing to past inflation problems that have not developed. They also pointed out that the fall in inflation last year requires some catching up this year to put prices back on their long-term trend. Such points, while largely true, nevertheless cannot erase today’s inflationary concerns for at least three reasons.

On the one hand, a surge in monetary growth accompanied the surge in prices, which was not present when earlier concerns were expressed. On the other hand, there is no reason to believe that prices are attempting in an orderly fashion to support a long term trend. They are just as likely to set a new, more abrupt trend. Third, and perhaps most convincingly, Washington experts were clearly surprised by the inflationary surge. The Federal Reserve, for example, told everyone at the end of 2020 that it expected inflation this year to be between 1.4% and 1.7%. When the reality of inflation left those numbers in the dust, the Fed estimated in June that inflation in 2021 would be between 3.1% and 3.5%. The current pace of price increases is expected to slow with remarkable suddenness to bring the average for the year closer to the Fed’s most recent estimates, let alone those of seven months ago. These failed predictions suggest that Washington experts may lack the in-depth understanding required to make their flippant layoffs compelling.

As anyone who lived through or studied the great inflation of the 1970s and 1980s will know, Washington’s recklessness contributed to the problem. This created a feeling among businessmen and investors as well as ordinary citizens that things were out of control and allowed expectations of future inflation to creep into wage and price decisions as well as in people planning. Because financial assets are denominated in dollars which then quickly lost their real purchasing power, investors fled financial assets to real estate and assets that they believed could keep up with the rising cost of living. Both trends have distorted the economy as well as the distribution of financial power. The nation’s long-term productive potential has suffered as a result. Maybe today’s real estate push is a sign that this kind of unproductive adjustment has started. Sadly, no one in Washington seems to have the slightest desire to address people’s concerns or the prospect of such devastating effects.

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