Inflation

Is Inflation Back for Good?

Prices are up all over the economy. Here are scenarios about what might happen next.

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This month brought the most worrying inflation news in decades. 

On June 10, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) "increased 0.6 percent in May on a seasonally adjusted basis after rising 0.8 percent in April," bringing the year-over-year price increase on all items to 5.0 percent. 

"This was the largest 12-month increase since a 5.4-percent increase for the period ending August 2008," the BLS noted. And when you take out food and energy, the resulting yearly rise of 3.8 percent was "the largest 12-month increase since the period ending June 1992."

CPI, whose components are constantly being adjusted, may well undercount inflation as most Americans experience it. As William Levin noted in National Review, medical costs account for just 8.9 percent of the CPI basket, even though they amount to 17.7 percent of GDP. And a massive one-quarter of the index is calculated not by assessing actual rental prices, but by asking homeowners the comparatively unscientific question, "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?"

Consumers are being faced with obvious and serious price hikes everywhere from Costco to Home Depot (lumber prices tripled! But are already adjusting down), from Uber and Lyft rides (up 40 percent) to Airbnb rentals (up 35 percent).

So does this mean that sustained, damaging, economy-wide price inflation is definitely back? Let's check out the arguments. 

Point: Inflation is back! Be very afraid.

These are among the many items becoming measurably more expensive this year: used cars, meat, oil, plastics, metals, toilet paper, semiconductors, polyurethane, packaging, cereal, soybeans, coffee, and corn. Bloomberg reports: "A United Nations gauge of world food costs climbed for a 12th straight month in May, its longest stretch in a decade. The relentless advance risks accelerating broader inflation, complicating central banks efforts to provide more stimulus."

The monthly Logistics Managers' Index (LMI) in its May report sees the prices of moving goods from place to place continuing to grow "at a meteoric pace." And the much-noted shortage of labor suggests that the price of workers is also going to go up.

Two main schools of thought contend among those who believe that massive sustained price inflation is either inevitable, or already here: Milton Friedman's monetarism, and the more bubble-focused analysis associated with the Austrian school of economics. 

Friedman's theory, which was widely accepted in the economics and finance professions decades ago but has been waning since asserts that "inflation is always and everywhere a monetary phenomenon." The correlations were indeed observable in the 1960s and 1970s, but the theoretical prediction of increased money supply leading to economy-wide price inflation has been failing to come true for many years now

Why might that connection between money supply and price be slipping? Theories include the Federal Reserve paying banks interest to just sit on uncirculating money. Another is that the "velocity" of money—the rate at which one dollar is used to purchase goods and services in a given time period—has fallen by nearly half since the beginning of the century.

But America has seen a lot more money lately, with the overall supply of the M1 monetary measure more than quadrupling in just the past 15 months. We have also in COVID times seen government injections of cash into the hands of business and citizens into the trillions, with the Federal Reserve committed to buying as much government debt as the government wants to feed into its spending machine.

GDP grew at a 6.4 annualized rate in the first quarter of 2021, and is expected to soon surpass its pre-COVID levels. The mindset that "inflation won't be a problem because it hasn't been a problem in decades" is itself the type of thinking that contributes to what the free-market Austrian school has long warned about: price bubbles caused by monetary growth. 

Austrians, like monetarists, also see a necessary logical connection between increased money supply and higher prices (adjusted for the amount of goods and services available for the money to buy). But they don't automatically assume that more money will mechanistically translate into economy wide CPI inflation. Rather, inflation might mostly be expressed in specific sectors, such as stocks, crypto, housing, collectibles, and any other available means to get out of dollars and into something with more perceived promise of holding value.

But those specialized areas where dollars flood into can all too often prove to be bubbles of "malinvestment" which, once popped, can produce economic wreckage and damaging policy reaction, the Austrians warn.   

Counterpoint: Everything's fine, don't worry about inflation!

Modern Monetary Theory, the hot modern excuse for the government to spend whatever it wants to spend, posits that as long as any resources of labor or capital in the economy are not currently being used productively, then more money in whatever amount presents no inflationary threat. MMTers will tell you that their hypothesis comports to the reality of the past few decades better than the monetarist insistence that more money equals more (inflationary) problems.

So what's the MMT and/or governing-Democratic explanation for the recent surge in CPI and sectoral inflation? It's all about unleashed demand as lockdowns fade and bank accounts swell with federal stimulus bucks, with manufacturers temporarily bidding up prices to make sure they are ready for the pent-up, post-COVID buying spree. After the recovery shakes out, the argument goes, prices will stop noticeably rising. 

An example bolstering the keep-calm thesis comes from the May BLS report, which shows that a whopping one-third of the seasonally adjusted CPI came from one sector: used automobiles, which rose 7.3 percent in May alone. Maybe if you can avoid buying a used car, you won't feel the inflationary pinch too much.

The White House Council of Economic Advisers (CEA) argued in April that the CPI spike seems scary only because of the "base effect" of rising from very low inflation in the pandemic-scarred year 2020. Fed Governor Lael Brainard assured us last month that we just need to be "patient through the transitory surge." (Inflation hawks are quick to retort that this is what the Federal Reserve folk insisted back in the 1970s, before our nation's last big inflationary spree, when for three years, 1979–81, CPI was rising over 10 percent per year.)

The Fed swears it will start tapering off its seemingly endless run of buying Treasury and mortgage-backed securities if the central bank's inflation target of 2 percent looks poised to be breached long-term. Temporary surges worry the bankers less.  

And even if CPI inflation continues to increase like it has this spring, the central bankers are confident they can rein it back in. As Brainard wrote: "If, in the future, inflation rises immoderately or persistently above target, and there is evidence that longer-term inflation expectations are moving above our longer-run goal, I would not hesitate to act and believe we have the tools to carefully guide inflation down to target."

But those tools are mainly recession-inducing hikes in interest rates. Will the political powers that be (and yes, the Federal Reserve, protestations to the contrary, is quite political) allow that to happen, or will savers, those living on fixed incomes, and those who don't want to be forced into speculative investments just to stay afloat, have to suck it up and endure a pricier existence?

A government in as much debt as the United States can be expected to be quite reluctant to let interest rates get too high—a very different situation from the 1970s and '80s when debt as percentage of GDP was about one-quarter what it is today. It's hard to believe that an economy drowning in debt and addicted to massive monetary stimulus will be ready to bloodlessly quash inflation via cutting off the cash spigot and/or raising interest rates significantly. 

So there is plenty of reason to suspect that the CPI spike of spring 2021 is not something that the Fed is prepared to cope with if it has legs beyond the COVID supply crunch hangover.

NEXT: Is Microsoft ‘Out To Get Conservatives’? And Is That Jim Jordan’s Business?

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  1. I blame the Fauci Flu.

    1. The technical term is #TrumpVirus.

      (I would also accept DeSantis Disease.)

      1. The true name is Communist Chinese Virus.
        That’s where it came from, that’s who deliberately spread it worldwide.

        1. SPEAKING OF THAT I’m hearing stories of a Chinese defector from the wuhan labs in American hands since February. curious if true and if true why is he being silenced by our government. China says he is in china but they won’t show him in person.

          1. Well, if what he’s rumored to be saying is true, they’d be shutting him up because they don’t want the voters demanding we go to war with China. Or at least stop sucking up to them.

            And it’s not like Biden can do that.

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          2. It does appear to be true. Redstate and Bannon have been on it a while.

  2. Nobody in this administration cares and certainly nobody in the democrat party is interested if you peons have to pay more or go broke. They are always looking toward their paymasters the same multinational corporations that are promoted around here. Elitists have common cause against you.

    1. Not so much MNC’s these days as their owners in the ChiCom. The democrats are pretty much a wholly owned subsidiary at this point.

  3. As Koch / Reason libertarians, I’m not sure why we would even care about inflation. So what, middle class households might pay a little more for necessities? News flash — a key characteristic of our philosophy is we don’t care about the middle class.

    Instead, our philosophy seeks to improve the finances of the richest people on the planet, especially our benefactor Charles Koch. Therefore our assessment of the economy’s strength really only depends on answering one question: Are billionaires accumulating additional wealth at an acceptably rapid rate? And in this Biden economy the verdict is clear.

    #BillionairesKnowBest

    1. The middle class makes up the vast majority of customers for all the products produced by Koch Industries – so maybe Charles Koch cares a little more about the middle class than you suggest.

      1. Koch sold the french fry salt mine to Cargill over a decade ago.

        1. Okay. Is that supposed to mean something within the context of my comment about the middle class being important customers for Koch Industries?

  4. I lived in Buenos Aires from 1988 to 1991. Printing money just to meet political debts always leads to tears eventually.

    1. “Tell me about it.”
      …Weimar Republic

      1. Weimar: foreign denominated debt and war reparations. Severe exogenous events – not just high levels of government debt – are always part of the hyperinflation problem, when it has occurred in the last 100 years or so.

    2. It boils down to enough Americans being willing to rid the country of the progressive movement. Which will largely entail eliminating the democrat party and their leftist boosters.

      Does anyone here have an alternative?

  5. I’ve heard the dove case on inflation. It’s basically presumption. The thinking is that, because it hasn’t happened, it can’t happen. But, asset price inflation has been a release valve for consumer price inflation. And asset valuations already seem to be stretched thin. And the thinking that “we learned how to deal with inflation in the 1970s” ignores exactly what happened then. Volcker didn’t just tweak a few cash flows or nudge a dial. He dropped the financial equivalent of an atom bomb launching a severe recession and throwing millions out of work. The S&L industry was thrown into turmoil. Anyone think, coming out of the pandemic, the Fed is going to have any appetite to repeat that? Especially with asset markets at high multiples and the government running massive deficits?

  6. Don’t worry, if inflation crops up the central government will simply mandate higher wages.

    Problem solved!

    1. Nothing a tax on the very wealthy won’t fix…until they move to other countries.

  7. Time to invest in wheelbarrows.

  8. Finally an intelligent article here about money and inflation.

    Not particularly complete but hey everyone has a big blind spot. In this case, the notion that govt is really the only cause of inflation because only govt creates money.

    When the fact is that it is banks that create money – and most of the money they create is private loans – mostly mortgages. Govt debt actually mostly serves as the ‘risk-free’ collateral underlying debt that gets traded. And all debt gets traded now.

    If we want to control inflation that is going to mean no more cheap subsidized mortgage lending. That is what punctures the main inflation bubble. But the great delusion of Americans is that higher housing prices has nothing to do with inflation. It’s the American dream. And if that has to subsidized, then as I said it’s the Americanfuckingdream and fuckoffyoucommiestryingtounderminetheAmericandream

    1. Poor Jeffy, can’t afford a house.

      1. I can afford to have my house go down in price. Can you?

    2. “…In this case, the notion that govt is really the only cause of inflation because only govt creates money.
      When the fact is that it is banks that create money – and most of the money they create is private loans – mostly mortgages…”

      Not at all surprising that history tells a different story. But that never stopped egomaniac arm-wavers so far.

    3. The banks create money but only to the extent that the Fed, ie the government, allows them to keep pyramiding loans on top of reserves with no consequences. Under a sound money system, any bank that issues too many loans will feel the pinch when other banks come to redeem their notes of credit. So the free market as always disciplines private actors and prevents one institutions profligacy from infecting the whole system.

      1. “one institutions profligacy from infecting the whole system”

        Enter the Democrats “Fix the Banks” solution of 1913 – The federal reserve act. Ironically leading to the Great Depression and fueling every Depression since then.

        And what was the ‘horror’ that started it all? ONE NYC bank giving out loans carelessly and failing.

        There’s no horrible situation the Democratic Party can’t Nationalize for every citizen to ‘horror’ with.

  9. And when you take out food and energy, the resulting yearly rise of 3.8 percent was “the largest 12-month increase since the period ending June 1992.”

    When you take out food and energy, you are lying through your teeth. Next take out housing. Then take out clothing. If you take out enough of what everyone HAS to buy, you can ‘control’ inflation for decades.

    1. That’s fine, they’re lying through their teeth with food and energy left in, too.

    2. >>Then take out clothing.

      not certain *everybody* should be nakes.

  10. Modern Monetary Theory, the hot modern excuse for the government to spend whatever it wants to spend, posits that as long as any resources of labor or capital in the economy are not currently being used productively, then more money in whatever amount presents no inflationary threat.

    So what’s the MMT and/or governing-Democratic explanation for the recent surge in CPI and sectoral inflation? It’s all about unleashed demand as lockdowns fade and bank accounts swell with federal stimulus bucks, with manufacturers temporarily bidding up prices to make sure they are ready for the pent-up, post-COVID buying spree.

    So, which is it?

  11. Just to be sure I should probably stock up on some essentials like whiskey and ramen noodles.

    I figure it is going to happen anyway so fuck it I’m going on vacation and thinking about buying one of those e-mustangs. Might as well enjoy it while we can.

  12. As much as I agree with the point, the following is rather pathetic evidence of monetary policy-induced inflation. “Consumers are being faced with obvious and serious price hikes everywhere from Costco to Home Depot (lumber prices tripled! But are already adjusting down), from Uber and Lyft rides (up 40 percent) to Airbnb rentals (up 35 percent).”

    Lumber prices increasing are clearly a result of supply side issues stemming from the pandemic. Rideshare costs are due a combination of increased demand as covid restrictions ease in the major cities and an increased regulatory burden. Same with Airbnb prices. Let’s try to use data that actually proves the point rather than scary numbers that are largely explained by other factors.

  13. Woohoo we moved from its not really happening, to its happening but it’s not a big deal

  14. Inflation always fixes itself, with a bust, a recession, a depression or stagnation. None of those are any fun either.

  15. As if inflation ever left.

  16. Inflation is what happens when the value of the currency depreciates. The government depreciates the currency when the Fed uses its computers to purchase securities, creating trillions of new dollars out of thin air. The Fed has been doing that for more than a decade now, but has really gone mad during the pandemic. If that doesn’t create widespread inflation, then something else is going on. It is the something else – actions in the marketplace – that determine the actual value of money – i.e., what money can purchase. Even if the market manages to largely compensate for what the Fed is doing, the market cannot prevent all of the enormous disruptions and destruction resulting from Fed actions. Sadly, many innocent people will be harmed. Mainstream, “consensus thinking” economists can’t figure out what to do about inflation, or about an economy that is not predictable. Power-craving politicians are even more in the dark. The hopeless confusion of economists and politicians results from sabotaging their rational thinking in their attempts to defy reality. And that’s a good thing.

  17. Printing banknotes or their digital equivalents is always bad for the economy regardless of how it manifests in price changes.

    1. But it’s as fun as printing ‘slaves’ for those who support it.
      See that $100 for 5-hrs labor just jumped to someone else’s 1-hr labor as the ‘slaves’ printer rolls out another Trillion of stolen labor.

  18. Is the price of ammunition included? Asking for a friend.

  19. As we scan the landscape of market commentary going into 2021, ‘the return of inflation, perhaps with a vengeance’ is a very, very common theme….. design company names

  20. Don’t overlook the obvious…

    Biden’ crappy energy policies have raised gasoline prices by 35% across my state (Virginia); diesel not quite so much. This correspondingly raises the price of all consumer goods. We did this very same thing in 2008-09.

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