For the first time in 31 years, inflation is now above six percent. The Consumer Price Index for October was 6.22 percent higher than in October last year.
After three months of price hikes tapering off, inflation is back with full force. Just as I predicted back in June, we are in the Fall of Inflation: the Bureau of Labor Statistics is reporting across-the-board price increases.
This is monetary inflation. As I explained back on October 20, our economy does not have a capacity problem; the constraints that do exist in such areas as trucking are caused entirely by government regulations. A case in point is the California law that prohibits trucks older than 2011 from operating within the state. While the Biden administration is focused on ports, there is a much more pressing problem on the trucking side of the logistics chain. Even a Politi-Fact “fact checker” has had to admit that California’s AB5, the law banning older trucks, is a culprit in the Golden State’s apparently unending supply-chain problems.
With that said, even the government-imposed problems in our logistics industry cannot account for the inflation we have. For the supply-chain problems to impact the economy, there first has to be money on the demand side. Since our economy is operating at a capacity roughly 5.6 million workers short of where it was in 2019, economic theory and common sense prescribe that we should see consumer spending – and by extension business investments – at a proportionately lower level. The fact that we are not is attributable to the very large amounts of cash that Congress has been pumping into the economy through its several stimulus bills.
In short: we are dealing with a bad case of monetized inflation. To make it worse, this monetized inflation is paired with subpar capacity utilization in the economy, which technically means we are in the thick of stagflation.
Figure 1 compares CPI inflation so far for 2021 with the same period in 2019. Again:
- In 2019 we had an employment rate – the share of the population that had job – of 61 percent; so far in 2021 that share stands at 58 percent;
- In 2019 the average unemployment rate was 3.7 percent; so far in 2021 it is 5.8 percent;
- Not only is unemployment higher, but the workforce itself is almost 2.6 million people smaller than in ’19.
While operating at lower capacity, our current economy is – again – plagued by inflation that won’t subside. Figure 1 reports the monthly year-to-year inflation rates (not seasonally adjusted):
The response from relevant government institutions to these high inflation rates have been muted so far. The prevailing talking point is that inflation is “transitory”, a concept that has no meaning in economic theory and serves no purpose in real life: in the long run, all inflation is transitory – even the high inflation we endured during the last stagflation episode. Therefore, it is refreshing to see Federal Reserve Vice Chairman Richard Clarida spell it out: inflation, he says, is “much more than a ‘moderate’ overshoot of our 2 percent longer-run inflation objective”.
Again, as I pointed out yesterday in my review of the latest producer-price inflation numbers, this is the reason why the Federal Reserve decided to start rolling back its Treasury purchase program sooner than it had previously signaled. the roll-back is also more aggressive than expected, with a six-month horizon for completion and a simultaneous tapering for both traditional Treasury securities and Mortgage-Backed securities.
The latter is going to impact on the mortgage-loan market, though it is too early to tell if it will be enough to cool off real estate prices.
To make the point about our inflation in a different format, let me also present the CPI numbers in the year-to-date format I used in yesterday’s PPI analysis. Watching prices rise from January and on through the year, Figure 2 reports that year-to-date inflation is now at 5.74 percent:
The year-to-date inflation rate for October is a high number, the 15th highest on record for the month of October (with data stretching back to 1913) but given that the inflation rate is again accelerating, it is likely that we will end the year somewhere in the bracket where the stagflation era found itself. In the month of December, year-to-date inflation was
- 8.3 percent in 1978,
- 12.3 percent in 1979,
- 10.9 percent in 1980, and
- 8.0 percent in 1981.
I predict that we will be in this bracket by the end of this year. The Federal Reserve’s shift in monetary policy will have an impact on inflation, but not before the turn of the year.
One factor that could dampen inflation is that Congress has ended its unemployment-bonus program across the country. Hopefully, this will lead to some rise in labor supply; if employment increases, the money printing that currently funds deficit-spending on entitlement benefits, will gradually be replaced by tax revenue. Where more value goes into the economy (workers producing value) and less newly minted cash is used to fund expenditures, the monetized inflation gap shrinks. This eases the inflation pressure that otherwise drives up prices across the economy.
These are hopes on my end. I don’t predict any immediate substantial effect of the demise of the unemployment bonus, and I cannot let go of the suspicion that the bonuses inspired creative fraud that, in turn, inflated unemployment numbers. Thereby, the expectations of a boost in employment after the bonus ended in select states, were exaggerated.
Again, this remains to be solidly proven, but the suspicion of widespread fraud is reinforced by the fact that at its height, the unemployment-bonus program on average paid out more than $6,000 per month per unemployed person.
In other words: the responsibility for eliminating inflation lies with Congress and the Federal Reserve. The central bank has how stepped up to the plate and taken its responsibility; when will Congress do the same?