Is inflation still “transient”, as the Federal Reserve and the White House like to say? Not if you’ve visited a grocery store, gas station, online retailer, or anywhere else in the US economy. And not to judge from Wednesday’s consumer price report for September, which showed the same rapid rate of inflation that has been apparent this year.
The Labor Department said the consumer price index rose 0.4% in September, from 0.3% in August. This means that the price level has increased 5.4% in the last 12 months and 6.5% on an annual basis so far in 2021. This is the largest increase in a year on the other since 2008, and the details of the report add to the evidence that inflation is likely to be persistent.
Remember when used car prices went up in the spring and various progressive wise men said that inflation would go away when those prices stopped rising? Well, in September, prices for used cars and trucks fell 0.7%, but the increase in the cost of other goods and services more than made up the difference.
By the way, used vehicle prices are still up 24.4% over the past 12 months, and new vehicle prices are up 1.3% on the month and 8.7% over the year. Try renting a car or truck and, assuming you find one, you’ll pay around 43% more than in September 2020.
Food and energy prices rose 0.9% and 1.3% respectively. While the Federal Reserve tends to overlook these two categories because they are volatile, consumers always pay for both. Beef prices have increased 17.6% in the past 12 months, and fresh fish and seafood are 10.7% higher. Major appliances are 9.6% more expensive, while furniture and bedding increased 11.2%. We could go on.
The September report also included portents of future inflation, including rising housing costs. Actual rents increased 0.5% for the month, while owner-equivalent rents increased 0.4%. The latter is all the more important since it represents nearly a quarter of the CPI, and the increase in housing costs appears with a lag in owner-equivalent rents. Housing costs have skyrocketed, with the Case-Shiller Index rising nearly 20% year-on-year in July. This increase will affect the CPI next year.
The debate over transient or persistent inflation boils down to whether the cause is a monetary shortage or a supply chain shortage linked to a pandemic. Supply shortages are real, and the pandemic has obviously played a role. The bond market has until recently been remarkably complacent, which is another argument for the transitional camp.
But we have learned from Milton Friedman that inflation is always and everywhere a monetary phenomenon. And there is no doubt that the Fed has been pursuing one of the most radical monetary experiments in history since April 2020. Actions were justified at the start of the pandemic to offset the damage when the government shut down the US economy. But the Fed maintained the same policies for around 19 months even as the economy returned to its pre-Covid GDP level.
The breadth of goods and increases in asset prices also suggest a monetary cause. Pick a financial asset or commodity and its price has gone up. Real estate is booming, including homes and farmland. A plot in Johnson County, Iowa recently sold for a record $ 26,000 an acre. So much money runs after assets that smart or manipulative people (take your pick) invent assets like non-fungible tokens for investing, some of which have no tangible value.
The dollar held up better than one might expect in widespread inflation, but the world’s other major central banks then continued the same policy of near or below zero rates and quantitative easing.
All of this has been great news for asset owners and many speculators, but workers are paying the price. Real average hourly earnings rose 0.2% in September, but are down 0.8% from a year ago. Real hourly earnings are down 1.9% since January, when Joe Biden became president. What the progressive government gives in transfer payments it takes in higher prices and lower real wages. (See the table nearby.)
The White House knows this has all become a political issue, which is why it ignores inflation and instead focuses on its frantic but belated efforts to resolve supply chain bottlenecks. It’s nice to see the Keynesians on the demand side in the White House and the media suddenly discovering the supply side. But if they really want to help with the supply, they will forgo the planned tax and regulatory increases for producers.
One event to watch is who takes political rap for 5% inflation. The term of Fed Chairman Jerome Powell expires next year and the White House may refuse to re-elect the candidate appointed by Trump and blame him. That wouldn’t be entirely fair, since Mr. Powell did what the White House and the Treasury wanted. But then the policy is unfair, as are the price increases.
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