Do Not Dismiss The Matter Of Inflation

Inflation has surged, casting a shadow over the otherwise welcome post-pandemic economic boom. It does not matter what price measure one prefers, all have accelerated: consumer prices and producer prices, commodities and the price deflators used in the Commerce Department’s national income accounts. So far, the authorities in Washington insist that there is no reason for concern, claiming that the phenomenon is “transitory.” They may be right, but coming on the heels of an endless flood of Federal Reserve (Fed)-provided liquidity and rapidly rising money supply measures, as well as clear evidence that the inflationary acceleration has surprised Washington’s experts, many quite reasonably are unwilling to ignore the figures. Should inflation take hold, it could destroy financial values and the wealth of literally millions of Americans.

All recent price measures inspire worry if not outright fear. The Labor Department’s consumer price index has risen at a 7.3% annual rate so far this year, up from 0.2% in 2020 and an average yearly rate of 1.5% for the prior five years, 2015-2019. Producer prices, what the Labor Department used to call wholesale prices, have risen at over a 10% annual rate so far this year, compared to 0.5% in 2020 and a 0.2% average yearly rate of increase between 2015 and 2019. The price deflator for the consumer part of the gross domestic product (GDP), the Fed’ preferred inflation gauge, has risen at a 5.4% annual rate so far this year, up from 1.4% in 2020 and an average yearly rate of 1.3% between 2015 and 2019. Oil prices have risen to levels seen only briefly during the last five years. Metals prices are also up sharply, while supermarket chains are stocking up on extra inventories to get ahead of rapidly rising food prices.

This news would be worrisome enough by itself, but underlying it is a plausible cause in the easy monetary policies followed by the Fed for years. Except for relatively minor adjustments along the way, the Fed has kept interest rates extremely low and poured funds into financial markets, since the 2008-2009 financial crisis in fact. Monetary policies of this kind are widely acknowledged as the cause of the great inflations of the 1970s and 1980s. Many throughout the last 10-12 years have expressed concerns over the inflationary potential implicit in the Fed’s policies, but it has been easy to dismiss them. For one, there were no signs of inflation, as there are today. For another, the money supply, the crucial link from policy to inflation, did not grow especially fast. But now matters are different. As should be evident, inflation has accelerated, while money growth has exploded. The broad M2 measure of money, for instance, has risen at a 22.2% annual rate during the last 17 months, well up from the 5.6% annual rate of expansion averaged between 2015 and 2019.

Against this background, it has become difficult indeed to accept the easy and sometimes offhand dismissals issued by Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen. To be sure, these and other Washington officials point to past inflation concerns that failed to develop. They have also made the point that last year’s inflationary dip begs some catchup this year to put prices back on their long-term trend. Such points, though broadly true, nonetheless cannot erase today’s inflationary concerns for at least three reasons.

For one, a surge in money growth has accompanied the surge in prices, neither of which were present when earlier concerns were voiced. For another, there is no reason whatsoever to think that prices in some tidy way are striving to sustain any long-term trend. They are just as likely to establish a new, steeper trend. Third and perhaps most compelling, Washington’s experts clearly have been surprised by the inflationary surge. The Federal Reserve, for example, told all at the end of 2020 that it expected inflation this year to run in the range of 1.4% to 1.7%. When inflation’s reality left these figures in the dust, the Fed in June estimated 2021 inflation would run between 3.1% and 3.5%. The current pace of price increase would have to slow with remarkable suddenness to bring the year’s average anywhere near the Fed’s most recent estimates, much less those of seven months ago. These missed forecasts suggest that perhaps Washington’s experts lack the thorough understanding required to make their glib dismissals compelling.

As anyone who lived through the great inflation of the 1970s and 1980s or has studied that time knows, Washington’s insouciance contributed to the problem. It created the sense among businesspeople and investors as well as ordinary citizens that matters were out of control and allowed expectations of future inflation to creep into wage and pricing decisions as well as people’s planning. Because financial assets are denominated in dollars that then were rapidly losing their real buying power, investors fled financial assets into real estate and assets that they believed would keep up with the rising cost of living. Both trends distorted the economy as well as the allocation of financial power. The nation’s long-term productive potential suffered accordingly. Perhaps today’s real estate surge is a sign that this kind of unproductive adjustment has begun. Sadly, no one in Washington seems to have the least inclination to respond to either people’s concerns or the prospect of such devastating effects.

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