News that the September Consumer Price Index (CPI) rose by 5.4 percent on a year-over-year basis should be evidence enough for Federal Reserve Chair Jerome Powell, White House economists, and even the president to admit that we have more than a temporary inflation uptick on our hands. Better yet, it's proof that we should avoid adding fuel to the fire, even if it means cutting back on President Joe Biden's multi-trillion-dollar American Rescue Plan.
Until recently, evidence of inflation exceeding 2 percent—the Fed's traditional goal for inflation—has been dismissed as temporary or transitory, and for good reason. Newly printed stimulus money has been passing through the system. This, accompanied by serious supply-chain disruptions, might be over in another 12 months—if we're lucky.
Then in August, the Biden administration indicated that 2021's economy would show as much as 4.8 percent inflation—but, with an optimistic spin, would fall to 2.5 percent the next year. Meanwhile, there is some stimulus money pending in the yet-to-be determined infrastructure bill, and that complicates the issue.
Avoiding the hard truth or waiting before countering inflationary forces carries a cost. In this case, delays could mean harsher action later when, for example, the Fed hits the money brakes harder to cool the economy. In such a case we might see interest rates head to the ceiling, construction activity and high-tech investment plummet, and the economy roll into a recession.
This is not the first time politicians have obscured the truth with wordplay. In 1978, the CPI was exceeding 7.5 percent and economic growth was slowing because of deliberate Fed action to cool the economy. Economist Fred Kahn, who chaired President Jimmy Carter's inflation tax force, was asked if he believed we were headed toward a depression. Kahn and other senior officials had been warned not to use the d-word. Somehow, it was believed that saying "depression" would become a self-fulfilling prophecy. They didn't even want to say "recession," so a new euphemism was created. Kahn responded in congressional testimony: "We're in danger of having the worst banana in 45 years."
The really bad banana (or r-word, to be more specific) came later during the Reagan years, when Fed chair Paul Volcker hit the brakes long and hard and squeezed out inflation, along with employment growth. The unemployment rate hit 10.8 percent in late 1982. Kahn's bad banana forecast ended up being accurate.
Needless to say, Washington leaders have long been reluctant to call a spade a spade. But today, the no-no isn't depression or even recession. It's referring to unqualified inflation. No one in authority wants to admit that the dollars we hold are systematically losing their purchasing power. We are being quietly robbed by Washington's dollar-printing press, with politicians calling the shots. The presses are not operating without drivers.
Seemingly, it's okay for the Fed chair to recognize CPI heading north, but only if he qualifies the trip by calling it temporary. And while Washington analysts argue that COVID-19 disruptions are affecting just some key items, such as used cars and lumber—and that ports clogged with container ships waiting for workers, drivers, and trucks to be unloaded are the culprit—an analysis of the price movements in the July Consumer Spending Index, which is the Fed's preferred inflation measuring rod, shows 84 percent of included items rising.
The price increases are widespread, which suggests they are embedded. No matter how analysts choose to slice and dice the data, the answer is the same: The U.S. inflation rate calls for taking offsetting actions, such as avoiding direct distributions of stimulus or minimum family income dollars (though not harsh, invasive measures to cool off the economy). Let us not forget that inflation is not about rising prices. The rising price level is the result of an inflated money supply—all those trillions of stimulus dollars now out and chasing harder after goods and services.
So, what should our esteemed political leaders do? Gazing into a crystal ball and talking about things that may be transitory is what soothsayers and fortunetellers do. Just give the public the unvarnished story.
Start your day with Reason. Get a daily brief of the most important stories and trends every weekday morning when you subscribe to Reason Roundup.