Friday, January 14, 2022

Our Inflation: More About It, and Six Truths

It’s strange to realize that most people in this country have never experienced price increases of more than 4% annually, but that’s correct.  We have not seen inflation as high as the annual 7% the Bureau of Labor Statistics announced Wednesday since 1981.  Accordingly, many can’t be counted on to understand it.  So here’s more.

It exceeds the money things cost, as pointed out by Neil Irwin in “There Is Shadow Inflation Taking Place All Around Us,” revised October 11th in The New York Times.  The author was writing about reductions in service which aren’t counted in tabulations of price increases, such as rarer cleaning of restaurants and hotel rooms and slower and less comprehensive product availability. 

If you think prices will increase more slowly soon, Matt Phillips, on October 26th also in the New York Times, disagreed with “The Bond Market Says Inflation Will Last.  You Should Be Listening.”  Per Phillips, bond prices can be measured by determining a “break even,” assuming that their five-year returns equal the projected inflation rate.  That reached “about 3 percent a year,” which, as low as that seems, would be “far higher than any time in the decade before the pandemic hit.” 

Back to Irwin, who, on December 31st and again in the Times, told us “What We Learned About the Economy in 2021.”  One of his four points was “people really, really, really don’t like inflation.”  It has been a source of “generalized discontent,” and has caused “poorer customer service,” “more hassle planning Christmas gifts far ahead of time,” and beyond.  It is too easy, as Irwin put it, to take attitudes of “that pay raise was money I earned fair and square” but “that higher grocery bill is an affront done to my by powerful forces beyond my control.”

Once more in The New York Times, we had Paul Krugman, in January 7th’s “Wonking Out:  Through A Price Index, Darkly,” give us some of inflation’s technical details, along with the sound observations that “economic developments since the pandemic began have taken place in Covid time – that is, they’ve moved at a pace that makes past ups and downs look as if they were filmed in slow motion” and “the one-year rate of change is more or less guaranteed to show continuing high inflation for a while even if actual price pressures are quickly fading away.”  The last, exemplified by the price of gasoline, is because such statistics show what has happened over the entire time period, and can conceal recent leveling-off or even dropping.

So what observations can we make about our current price increases?

First, this is not typical inflation with root causes self-sustaining and hard to pinpoint.  It is due to temporary supply-chain disruptions cutting supply, higher wages increasing business costs, and irregular demand from the pandemic’s changes.  That means the usual recommended measures may not be effective or necessary. 

Second, the past 40 years notwithstanding, we have had inflation during much of our history.  Per, the average rate since 1914 has been 3.25 percent, which means that at times it has been more.  It’s normal.

Third, zeroing in on cutting inflation would mean more shortages of both goods and workers and higher unemployment, neither of which is popular either.

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