Inflation: Everything becomes more expensive. Is it time to worry?
Everything seems more expensive.
Gas prices are in the lead, up more than 45% from a year ago.
But there is an important asterisk here. Gas prices are often relatively volatile and a year ago they were extremely low.
Car prices are being driven up by strong consumer demand for cars, as well as a limited supply due to a shortage of computer chips needed to build cars. Car rental companies, a key seller of used cars, already sold a large chunk of their car fleet last year to raise money during the pandemic and now don’t have enough cars to rent.
People emerging from the pandemic and spending the money they saved or the money they receive from the government are at the heart of it all. But Isidore writes that there is a serious question as to whether this price bubble will be permanent:
While prolonged inflation may be a cause for concern, there is reason to believe that this recent price increase – albeit pronounced – will be temporary. Inflation is skyrocketing in part because prices return to normal levels after the economy falls into recession. This makes year-over-year comparisons seem electric, translating into big increases.
People are traveling. His example is the travel industry, where prices are on the rise, but not compared to the pre-pandemic period.
Air fares have increased 24.6% in the past 12 months, while prices for hotels and motels have increased 15.1%. But both are still below their June 2019 level, before the pandemic.
Isidore speaks with economists who believe this is a post-Covid demand frenzy and that supply will return to normal as production and supply chains return to normal.
He also talks to economists who believe higher prices are here to stay. Labor shortages have now led companies to offer higher wages, for example. They probably won’t start cutting wages in a few months. Some of it is permanent (and good for workers making more money!).
Argument: That too will pass. The Federal Reserve recognizes inflation, but won’t do anything anytime soon, according to Federal Reserve Chairman Jerome Powell, who testified on Capitol Hill Wednesday.
Inflation, Powell said in remarks to the House Financial Services Committee, “has risen dramatically and will likely remain high in the coming months before moderating.”
Bottlenecks partially responsible for inflation are expected to disappear and other parts of the economy, the labor market, have yet to rebound.
Inflation is now a political weapon. But the fear of inflation is not just an economic debate. Republicans have used inflation and especially gas prices to oppose additional government spending by the Biden administration.
Democrats see their efforts to rebuild the country’s infrastructure with a $ 3.5 trillion investment for a fairer and more environmentally friendly world as a wise investment. Republicans in general disagree, and they will use inflation to fight spending.
Inflation today vs inflation in the 1980s. I asked Isidore, who pays a lot of attention to inflation, about McConnell’s comparison and he offered important context:
There’s no question that money going directly to Americans, like the additional $ 1,600 Biden passed earlier this year or the new children’s credit, puts more money to spend. More spending creates more demand, and with not significantly higher supply, more demand means higher prices.
Higher wages to attract workers will have the same effect.
But we’re a long way, a long way from 1980. One difference – a much larger percentage of the workforce had union contracts with cost-of-living adjustments or COLAs built in at the time, so higher inflation. meant higher wages, meant higher inflation. This is called the inflationary spiral.
There was also much less competition from foreign products. The wages could therefore go crazy. I am old enough to remember those days. To paraphrase Lloyd Bentsen: I know the inflation of the 1980s. The inflation of the 1980s was not my friend. This is not the inflation of the 80s.
The inflation rate for 1980 as a whole was 13.5%, whereas in 1981, since McConnell raised it, it was 10.3% for all goods, throughout the year. And there was no black swan, a unique event that distorted comparisons from year to year.
Today, while the 12-month change in June was 5.4%, the annual growth rate in the first half of the year was only 3.4%. It’s much worse than before the pandemic. But not crazy in the double digits with exceptions in a few categories.
There are also Democratic critiques of Biden’s policies. Notably, Larry Summers, the former Treasury Secretary to President Bill Clinton who was kicked out of the Biden administration, who sounded the alarm bells about inflation in part caused by government spending for months.
Summers met with Biden aides at the White House on Tuesday. Perhaps they were trying to get him to stop sounding the alarm bells about inflation as they pushed their fellow Democrats to agree to new government spending.
The high prices, meanwhile, will be something to watch and pay for for everyone.