Is Inflation Back for Good?
This month brought the most worrying inflation news in decades.
On June 10, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) “increased 0.6 percent in May on a seasonally adjusted basis after rising 0.8 percent in April,” bringing the year-over-year price increase on all items to 5.0 percent.
“This was the largest 12-month increase since a 5.4-percent increase for the period ending August 2008,” the BLS noted. And when you take out food and energy, the resulting yearly rise of 3.8 percent was “the largest 12-month increase since the period ending June 1992.”
CPI, whose components are constantly being adjusted, may well undercount inflation as most Americans experience it. As William Levin noted in National Review, medical costs account for just 8.9 percent of the CPI basket, even though they amount to 17.7 percent of GDP. And a massive one-quarter of the index is calculated not by assessing actual rental prices, but by asking homeowners the comparatively unscientific question, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
Consumers are being faced with obvious and serious price hikes everywhere from Costco to Home Depot (lumber prices tripled! But are already adjusting down), from Uber and Lyft rides (up 40 percent) to Airbnb rentals (up 35 percent).
So does this mean that sustained, damaging, economy-wide price inflation is definitely back? Let’s check out the arguments.
Point: Inflation is back! Be very afraid.
These are among the many items becoming measurably more expensive this year: used cars, meat, oil, plastics, metals, toilet paper, semiconductors, polyurethane, packaging, cereal, soybeans, coffee, and corn. Bloomberg reports: “A United Nations gauge of world food costs climbed for a 12th straight month in May, its longest stretch in a decade. The relentless advance risks accelerating broader inflation, complicating central banks efforts to provide more stimulus.”
The monthly Logistics Managers’ Index (LMI) in its May report sees the prices of moving goods from place to place continuing to grow “at a meteoric pace.” And the much-noted shortage of labor suggests that the price of workers is also going to go up.
Two main schools of thought contend among those who believe that massive sustained price inflation is either inevitable, or already here: Milton Friedman’s monetarism, and the more bubble-focused analysis associated with the Austrian school of economics.
Friedman’s theory, which was widely accepted in the economics and finance professions decades ago but has been waning since asserts that “inflation is always and everywhere a monetary phenomenon.” The correlations were indeed observable in the 1960s and 1970s, but the theoretical prediction of increased money supply leading to economy-wide price inflation has been failing to come true for many years now.
Why might that connection between money supply and price be slipping? Theories include the Federal Reserve paying banks interest to just sit on uncirculating money. Another is that the “velocity” of money—the rate at which one dollar is used to purchase goods and services in a given time period—has fallen by nearly half since the beginning of the century.
But America has seen a lot more money lately, with the overall supply of the M1 monetary measure more than quadrupling in just the past 15 months. We have also in COVID times seen government injections of cash into the hands of business and citizens into the trillions, with the Federal Reserve committed to buying as much government debt as the government wants to feed into its spending machine.
GDP grew at a 6.4 annualized rate in the first quarter of 2021, and is expected to soon surpass its pre-COVID levels. The mindset that “inflation won’t be a problem because it hasn’t been a problem in decades” is itself the type of thinking th
Article from Latest – Reason.com