For a long time, inflation has been the phantom of the American economy: often expected but never seen. But the latest Consumer Price Index, which showed that prices rose by 5% from May of last year to May of this year, raises fears that it is breaking down the front door and taking over the guest room.
The price jump was the biggest one-month increase since 2008. It appears to support the warning of former Treasury Secretary Larry Summers, who wrote in February that President Joe Biden’s budget binge could “set off inflationary pressures of a kind we have not seen in a generation.” Senate Republican leader Mitch McConnell charged last month that the administration has already produced “raging inflation.”
For anyone who lived through the turbulence of the 1970s, when the CPI climbed year after year, peaking at a rate of more than 13%, the specter of inflation is enough to induce night terrors. One of the great governmental marvels of the past 40 years was the Federal Reserve’s complete conquest of this malady. To let it return would be a grievous setback.
There are reasons to think that could happen. The Fed has pumped huge sums of money into the economy to offset the effects of the pandemic, and the Biden administration got Congress to approve a huge economic relief package.
Americans saved a lot over the past year, and if they decide to burn through all that cash, they could push prices still higher.
At this point, though, watchful concern is a more appropriate attitude than outright alarm. For now, I’m not worried — not very worried, anyway — about inflation.
Why not? One reason is that a spike in prices is not inflation any more than a stretch of rain is Noah’s flood. It’s no surprise that prices in May were appreciably higher than a year earlier — when much of the economy was shut down because of the pandemic.
Prices will keep going up as life continues to return to normal and Americans rush to spend money on all the things they missed because of COVID-19. Lingering supply chain snarls will put additional pressure on prices. But this should be a one-time phenomenon. Inflation is not inflation unless it persists over months and years.
Another reason for optimism is that even when it was trying to raise the inflation rate, during and after the Great Recession, the Federal Reserve found it remained stubbornly low. The central bank's monetary expansion should have brought about the higher inflation it sought.
But it didn't -- suggesting that something has changed about the connection between the money supply and consumer prices.
Back then, conservative critics forecast an outbreak of inflation caused by easy money and excessive federal spending. In 2009, economist Arthur Laffer wrote, "We can expect rapidly rising prices and much, much higher interest rates over the next four or five years." Sen. Rand Paul, R-Ky., said Americans should be "prepared to carry money to the grocery store in a wheelbarrow."
Let's hope their hallucinations have subsided. If those policies didn't cause inflation then, they may not cause it now. Stable prices have become the intractable norm over the past quarter-century, for reasons we don't fully understand. Loose fiscal and monetary policies don't seem to matter the way they once did.
One danger is that the recent price increases will fuel inflationary expectations, prompting businesses to raise prices and workers to demand higher wages, setting off a self-perpetuating upward spiral. But what inflationary expectations are we talking about?
Data compiled by the Federal Reserve Bank of St. Louis indicate that, as of June 10, the expected inflation rate over the next five years is just 2.23%. Interest rates on 30-year mortgages have fallen below 3%, compared with nearly 5% in 2018.
Given their performance over the past 13 years, it's not unreasonable to believe that the Federal Reserve officials who set monetary policy actually know what they're doing. When the pandemic hit, the economy was well into the longest peacetime expansion ever -- and inflation was still subdued.
Fed Chairman Jerome Powell and his colleagues have earned the benefit of the doubt. They haven't forgotten the trauma of the 1970s, and they don't want to go down in history as the people who brought it back.
When prices jump, vigilance against inflation is entirely justified. But we should also watch out for false alarms.
11 thoughts on “Why I’m Not (Very) Worried About Inflation”
When the national debt will soon be the entire gross national product an inevitable crash is going to happen, if not in 6 months the a year or in two years.
Not even the Keynesians believe in that type of spending.
Seems that some monopolist players on the central committee want to bring down this system.
Well said, Gail.
with all due respect I don’t agree. the rate of inflation is ALREADY way above your stats. just go outside and look at pricing and the value of retirement dollars sitting in personal accounts.
If printing fiat money and generating a false economy all the while allowing the common worker to be on welfare is good practice, then we will be the next Cuba,,,,,
Even Cuba can’t survive without an influx of hard currency from productive states,
Will we face Depression ahead ??
THIS WA A VERY BORING ARTICLE. YOU CAN DO BETTER.
Take it easy Stanley. It’s a matter that interests plenty of people, particularly homeowners!
I’m in the construction business. Material prices have risen at a much higher rate than the CPI of 5%. Plywood is up 300%, and steel is up 50% since last year. As for labor? We can’t even find anyone who wants to work. They’re making more on Unemployment.
It isn’t just construction. A restaurant owner here couldn’t find anyone to make pizzas for less than $32.00/hour. Gasoline prices are $1.00 a gallon higher and climbing.
This is in a small, Southern town, not a high-cost large city.
I agree with Gail, so, yes, I’m very worried.
What spooks me, is the expectations businesses and investors have developed. Business managers may not accept the losses they incured during the Pandemic. They may just inflate prices to get profits back to their previous predictions. I also remember the classic formula; “Too much money chasing too few goods”. One reason inflation has stayed low, is the constant surplus of goods. In some areas, that has ended, at least for now. Energy is also a big factor in… everything. The current energy policy, based on the global redistribution of wealth (aka climate change) will increase the cost of everything in the United States. Increased costs, will increase the upward pressure on wages, with the tight labor market.
As a capitalist, I worked, improved my skill set, saved, and invested. That formula did not work for 100% of the ever growing population, so now we flirt with socialism. There is no hard line between capitalism and socialism. You do not need a regime change to install a socialist economy. Everytime we address a problem either real or contrived, by throwing public money at it, we move closer to a socialist state. I do not expect that any government in the U.S. will confiscate what I have by force, and redistribute it to “The People”. It is far easier to just give away trillions of unbacked dollars. The resulting inflation will quickly reduce what I have worked for to chump change. At some point, I will then have to give up my real property, and move into the same 600 s.f. publically rent subsidized apartment, that everyone else like me is living in. You know, the apartments with more cameras than toilets. I am not knocking that lifestyle. How can I when the majority of the people in my country recommend it. Especially our wise accedemics, far more intelligent than I am. Yes, we will have inflation, until the very few have all the wealth, and the rest of us live in shades of gray. Oh, wait, maybe I confused our future with North Korea.
There is no inflation. Things just cost more. Example: Let’s say gasoline costs $4.00 / gallon. If it is not that much today, it will be by the 4th of July. We will spend, on average, $200 each month for gas, $2400 each year (one car). However, you can easy buy that gas for $20. How? Pay for it with a $20 Double Eagle gold coin,. Yes, it was minted as twenty U.S. dollars, but you can sell the gold now for roughly the cost of a years worth of gasoline. Did gas go up,.or did your government cause inflation to errode the value of your paper currency? Inflation to pay off the debts from their profligate spending? How much more profligate spending have they done recently?
I must respectfully disagree. I think Mr. Chapman is whistling past the graveyard and hoping for the best. The money supply is not infinitely elastic. And the dollar is under attack from others, principally the Chinese. If they succeed in replacing the dollar with the yuan or some sort of crypto currency, the kind of massive hyperinflation previously feared is certainly possible. The lunatic fringe (Democrats) are spending tax dollars like it was Monopoly money.
Comments are closed.