Friday, October 22, 2021

Four Months of Highly Understandable Inflation, and Our Best Attitude About It

In June, per “Prices Pop Again, and Fed and White House Seek to Ease Inflation Fears” (Jeanna Smialek and Jim Tankersley, The New York Times, July 13th), “a key measure of inflation spiked,” reaching 5.4 percent, which in the 1960s and early 1970s was a perfectly ordinary rate (in the late 1970s it was much higher), and about what basic savings accounts paid.  Much of this bulge was from used cars, and the rest from supply-chain problems and slower-than-expected employment gains.  I wrote then that it was nothing to worry about – is that still true?

The day after that, Smialek reported, again in the New York Times, that “Fed Chair Powell Sees Months of High Inflation, but Then Moderation.”  Powell has been a sober, consistent voice, exactly what best serves the Federal Reserve, which left interest rates unchanged and very low, and he continued that here.

In August, another 5.4% inflation month, as per Smialek, once more in the Times, “Consumer Prices Keep Climbing as Fed and White House Await a Cool-Down” (August 11th).  Wages went up “as employers scrambled to hire and rehire,” and Chipotle price increases, to name one restaurant chain, precipitated, per its CEO, “very little resistance.”  That was all natural and appropriate, as well summarized by Paul Krugman the next day in the same publication, in “Don’t Let Inflation Anxiety Undermine Our Future.”  Krugman backed the then $3.5 trillion infrastructure plan, including its nonphysical components, but acknowledged that such “would take a long time to materialize,” before he ended with “build we can, and build we must.” 

We got word on the next month’s data in “Inflation rose again in July, the Fed’s preferred measure of prices shows” (Coral Murphy Marcos, The New York Times, August 27th).  The rate actually fell then, to 4.2 percent, with a comment from a chief economist that “the economy is still recalibrating.” 

Panicking resumed with the August information, as “Inflation Warning Signs Flash Red, Posing Challenge for Washington,” published October 1st, again by Smialek in the Times.  The annual rate here of 4.3% hardly seemed to require urgent action, especially given the probable crest of the container-ship logjam and low-end pay reaching and exceeding $15 per hour in most places.  (Note that the free market has almost overwritten any need for that to be the national minimum wage.)  I don’t see why that was either unexpected or disturbing, especially when coupled with “Fed’s Bullard:  U.S. businesses having no problems raising prices” (Reuters, October 4th).  As before that is healthy and normal, as people both eager to spend and knowledgeable about higher costs will take the push.  Still the fear continued, as the “Risk of high inflation dogs central bankers as consumer expectations climb” on October 12th once more by Smialek in the New York Times, but, thankfully, per Federal Reserve vice chair Richard H. Clarida, most in that department “generally view that, so long as the recovery remains on track, a gradual tapering of our asset purchases that concludes around the middle of next year may soon be warranted,” but no more, while per Smialek “interest rates are expected to remain near zero for months or even years.” 

Although it isn’t reasonable to blame any one person or group for our rising prices, Peter Coy, in The New York Times on October 15th, reminded those not sure in “Don’t Blame Workers for Inflation.”  That is easy to do, but, per Coy’s research, wages since 2018 have gone up less than consumer prices, and “economists disagree on how much worker incomes will eventually spill over into the general price level.”  However, Jeanna Smialek, twice more in the same publication, determined that “Rising Rents are Fueling Inflation, Posing Trouble for the Fed” (October 15th) and “A regional Fed analysis suggests Biden’s stimulus is temporarily stoking inflation” (October 18th).  Economic stimuli should do just that, as ideally they should largely be spent instead of saved, and the first, “exacerbated by work stoppages, supply shortages and labor constraints” handcuffing real estate developers, makes sense as well. 

Overall, our current level of inflation should not make us lose sleep.  It has clear origins, all from the Covid-19 root cause.  There remain vast trillions of capital dollars ready to fund business opportunities when they present themselves.  We are almost certainly within a year of far better alignment of work and workers, which we will resolve at a level of high prosperity.  Then we may again see 2% inflation, but if we don’t we will still flourish.  Social Security checks, as widely reported, will grow 5.9% next year.  So for now, depending on your outlook, you can worry about climate change, gray goo, creeping socialism, or another Trump election, but don’t be concerned about prices going up.

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