Tuesday, September 14, 2021

What Is Real Inflation?


Financial FAQs


The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in August on a seasonally adjusted basis after rising 0.5 percent in July, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.3 percent before seasonal adjustment.”

The above FRED cpi graph shows the most recent spike in retail inflation, but also its relative insignificance compared to past inflationary surges, especially in the 1970s and 1980s.

Then why so much worry about its recent spike? Because Wall Street investors like cheap money, and bond holders’ low inflation, and they worry that the Federal Reserve might react too soon to such an inflationary surge by tightening credit, when it’s primary goal should be to keep people employed and consumers happy.

Is inflation one of the major problems facing the US economy today? You would think so listening to major commentators and some economists. Zanny Minton Bedoes, Editor in Chief of The Economist, said it was the major problem for sustainable economic growth if prolonged on Fareed Zakaria’s Sunday TV cast recently.

Consumers and businesses also like cheap money to buy homes and things, but they aren’t so worried at present because lots of COVID-19 recovery money is available and in circulation.

Therefore, it’s a little early to be worrying about what I call real inflation—prices rising faster than wages for more than a few months. And the August CPI showed its first decline in 8 months from 5.5 to 5.3 percent August.

Economists have little to say about what causes long term inflation in the US. They only have the 1970s as an example. The FRED cpi graph shows when it really peaked. It was during the 1975 and 1980 recessions largely because the 1973 Arab oil embargo cut off Middle Eastern oil on our very oil dependent, auto-driven economy—before we began switching to renewable energy sources and more energy efficient regulations on homes and businesses.

Labor unions in the 1970s were able to push their wage demands to keep up with skyrocketing prices; oil was more than $100 per barrel, and there were long lines at gas stations—those stations that still had gas to sell. It was a hectic time, but is hardly the problem today, even with fewer workers and disrupted supply chains to meet the surging economic recovery.

The Fed’s Jerome Powell has said they will be vigilant if it remains high for too long, but that would mean labor costs, which are approximately two-thirds of product costs, continue to increase as they have since the end of this pandemic-induced recession in April, 2020.


Wages and salaries rose 10.1 percent annually in July 2021, per the latest available data on the above FRED graph, an uncomfortable level if prolonged. It reached its highest level in the 1970s, per the FRED graph on wages and salaries that dates from 1960. But as the Federal Reserve tightened inflation controls in 1980 by initially raising interest rates to double digits, and labor lost much of its bargaining clout as union membership declined, inflation began its long descent to the 2 percent average that has pretty much prevailed since the 1990s.

In fact, it has declined so much that the problem since the end of the Great Recession has been how to keep a healthy level of inflation. This was motivated by the fear of a repeat of Japan’s decades long era of deflation when its economy was shrinking.

So what inflation should we worry about? Inflation caused when businesses and government aren’t investing in productive enterprises, which has been the case in recent decades—with a strong safety net that makes consumers feel safe and not on the verge of bankruptcy with every unexpected downturn; such as the Biden administration has proposed; and investments in infrastructure and future technologies that will insure there are good jobs for all of US

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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