IS INFLATION COMING OR GOING?

 To inflate or not to inflate? That is the question. ~ Jerome H. (Hamlet) Powell   

The principal issue in the eccentric world of macroeconomic policy-making focuses on inflation, as my currently-germane alteration of Hamlet’s famous soliloquy states above. Is it rising and staying for a while or is it merely a temporary drive-by event?

Even though a great deal depends on it, no one knows the answer. That’s despite economists’ reviewing decades of data and using their forecasting models day and night. That hasn’t stopped specialists from offering many differing opinions; following the adage, “often wrong, but never in doubt.” Perhaps macroeconomists should add trendspotting algorithms that have become popular in the fashion industry into their models.

For economists, inflation refers to an increase in the overall level of a nation’s prices. More technically, inflation occurs when aggregate prices of consumer goods and services rise due to “excessive” demand or insufficient supply. As prices rise, the purchasing value of money consequently falls.

Aggregate prices is a nebulous macroeconomic concept referring to a measure of prices for all of our nation’s final goods and services– from soap to syringes, and everything in-between, like Buicks, donuts and urologist visits. Our most-often used measure of inflation is the Consumer Price Index (CPI) that is calculated monthly by the Labor Department’s Bureau of Labor Statistics (BLS).

The CPI offers quite a few different “flavors” of prices, like prices for urban consumers, for urban wage earners and for the elderly. The BLS gathers data on consumer prices for each of 211 different categories of consumer items (the “market basket” of goods and services) in 38 different geographical areas throughout the US.

When the BLS released the May CPI information on June 10, the media and others took serious note. During the last 12 months, the CPI increased 5.0%, the largest 12-month increase since August 2008. This annualized increase is over two times as large as the 2% inflation rate that Mr. Powell, Chair of Federal Reserve Bank, hopes to see.

At the Fed’s summer meetings last week, officials stated they would keep interest rates near zero, but explicitly stated they would consider increasing rates, perhaps twice by the end of 2023 if inflation persists. This statement is a direct reaction to the May CPI announcement. 2023 is a year sooner than the Fed has previously stated for considering interest rate changes. The Fed thus has increased inflationary expectations. Unsurprisingly, stock markets took that news poorly, dropping almost one percent and bond yields increased.

The Fed steadfastly maintains that current inflation is “transitory,” never defining what that term means. The last two months have presented higher-than-expected annualized inflation, 4.2% in April, 5.0% in May. If June’s CPI number is 4% or greater. it will be much harder for the Fed to proclaim again it is transitory. We’ll know on July 13.

The Fed’s transitory belief rests on two premises. First, aggregate production will continue to increase steadily as recent parts shortages and supply-chain lags ameliorate, like chip-sets for autos and trucks and lumber for construction. Second, consumers’ demand for goods and services now reflects surging needs that were restricted during the extended covid period; these will taper. Thus, after this temporary phase, markets will get back to “more normal” behavior with more goods and services available and less pent-up demand.

Most importantly, policy-makers need to adopt a more farsighted view of our economic activities, which is vital for producing well-founded economic programs. Monthly CPI data are interesting and instructive, just as weekly unemployment claims requests are. But these very short-term data are inherently quite variable. Their use should not be overemphasized, as they seemed to have become. Most economists are far better at drilling down for detailed information than we are at looking up. Adopting a broader, longer-term perspective will produce stronger, fairer policies.

The media have filled screens, airwaves and newsprint with stories about how May’s unexpectedly large CPI reflected price increases in specific slices of the economy. A Washington Post story mentioned consumers are paying more for an array of products, including bacon and used Buicks, as the economy rebounds strongly from the brief covid-led recession.

Several items whose prices have notably risen include used cars (Buicks and beyond), furniture, gasoline, washing machines and dryers, bicycles, lumber and airfare. Beef and non-Congressional pork prices have also risen.

But not to worry spending-fans. In January, House Dems after a decade-long ban, resurrected personal earmarked projects. These “pork” projects can be specifically-funded by a single Congressperson that circumvent the standard merit-based and competitive allocation process. How can you be upset at this change? There’s a $1.4 trillion per year limit for such projects. The Dems insist these pork-rind earmarks will provide lawmakers new tools to better serve their communities, and bring home the higher-priced bacon. Praise be? Not.

Back to Buicks. The mention of old Buicks immediately recalled my grandfather’s, which looked much like the one shown below. When we visited, he drove us in his sweet midnight-black, side-portholed Buick on fine Sunday rides through Western Massachusetts countryside. They don’t build them like that anymore.

 

 1951 Buick Special sedan

A 1951 Buick Special cost $1,800, which in today’s dollars is $18,637. The 2021 Buick Encore, the lowest-priced model like the Special, costs $26,260. That’s fair amount of auto inflation, to the tune of $7,623 more than the CPI-adjusted Special price. This 41% premium accounts in part for the vast increases in Buicks’ automotive quality and technical improvements gained by GM over the past 70 years.

Our inflation rates have steadily fallen during the last 50 years, as shown in this table. The average

Decade	Average Yearly Inflation Rate
1971-80	7.86%
1981-90	4.74%
1991-2000	2.81%
2001-10	2.38%
2011-20	1.73%
Source: DOL/BLS

 yearly inflation rate during the 1970s was 7.86%. Two international oil crises and subsequent stagflation in the late 1970s – early 1980s caused its loftiness. Stagflation is a truly nasty, worst-of-both-worlds combination of high inflation juxtaposed with elevated unemployment. In January 1981, the interest rate set by the Fed, the Federal Funds Rate (FFR), as a basis for monetary policy was 19.08%, together with 7.5% unemployment and 10.3% inflation. Terrible times for everyone.

After 1982, US annual inflation has never been greater than 5.4%. Thus, any American younger than 40 years old would think high inflation was more than 5%, at worst. Long gone are the nasty macroeconomic mid-1970s and early 1980s, when inflation never got below 5.7%.

The most recent decade’s average inflation rate was 1.73%, thankfully less than one-quarter the 1970s level. The FFR currently remains a rock-bottom 0.06%, unemployment has been steadily dropping since April 2020, now is 5.8%.

Although people remain concerned about inflation, US price increases are far smaller than a several other countries. Venezuela’s citizens have faced the world’s worst inflation for years due to massive government malfeasance. Last years’ inflation in Venezuela was a gigantic 9,568%, down from a stratospheric 1,698,488% in 2018. Venezuela’s cumulative inflation from 2016 to early 2019 was estimated at 53,798,500%. This unfathomable inflation is the reason Venezuela’s official minimum monthly wage is currently worth only $3.20. Zimbabwe, always high in international rankings, has the second-topmost inflation at 767%. Such giant hyperinflation rates are usually caused by the government’s oversized increase in the money supply that cannot be warranted by (absent) economic growth.

Meanwhile back in Washington, Dems in Congress continue wrestling with how to fund the administration’s expansive infrastructure programs. Fearing that their more moderate colleagues’ nascent, bipartisan $1 trillion (T) effort will ignore many of their priorities, progressive Dems’ latest idea is to combine all their sprawling hopes into one single, giant effort, perhaps as large as $6T – a wish-list including most Prog favorites. The combined $7T possible infrastructure spending would represent 33% of our current GDP. No matter how worthy such outlays might be, they would likely unleash intimidating inflationary pressures.

Each of these bills face formidable odds of passing in no small part because they will require every Senate Dem to vote for them. Approving a single, $6T bill for widely-demarcated infrastructure will push way beyond Senate prospects. One other hindrance is Congress’ feeble work schedule. House members plan to toil in Washington only 9 days between now and Labor Day; Senators just 16 days. The House will not be in session at any time in August. Legislative life on Capitol Hill is indeed very different from other workplaces. Does such a schedule justify why we taxpayers provide these “legislators” with a perhaps-inflated $174,000 salary?