Americans want to blame someone for the post-pandemic inflation surge, according to most polls. Yet when in our history has it been a real problem affecting serious economic growth?
Consumer prices rose again in August to reach a 3.7% yearly rate, based on Wednesday’s release of the monthly consumer-price index. That marked its biggest jump in 14 months and a higher reading than the recent 3% low set in June (see chart) as the toll of the Fed’s rate hikes kicked in.
Horrors, according to some pundits! But it hasn’t affected economic growth which is again surging after the pandemic—up 2.1 percent in Q2. And just last week S&P Global Market Intelligence raised its third-quarter GDP estimate by nearly two percentage points to an annualized rate of 4%, citing strong retail sales data. It moved its annual estimate up slightly to a historically strong 2.3 percent.
What makes the above FRED consumer price index (CPI) chart more interesting is that I have dated it to World War I; yes, pre-1920 and World War I; to give inflation the proper historical perspective. It shows that inflation, in fact, has rarely been a problem in our up-and-down consumer-driven capitalist economy.
Why? We have seldom had a supply problem—i.e., not enough goods and services to balance out and keep inflation in check—because the US economy is very productive and able to quickly meet surging demand.
The 1970’s stagflation era when the CPI topped out at 14 percent in 1980 was an exception because we didn’t yet have the means to produce enough oil, and OPEC did, so they embargoed the supply to US because of our support of the Arab-Israeli War, which sent oil prices skyrocketing that we depended on.
The other major peak was 1947 when post-WWII consumers demanded more while our WWII economy was just beginning to shift out of war-mode and produce autos instead of tanks.
(The earlier 1917 to 1920 spikes were for the same reason—a WWI economy shifting back to a peacetime economy.)
Looking at the graph again, moderate inflation has been the norm—averaging around 2.5 percent and never more than 5 percent since 1980—until the post-pandemic spike, which again was mainly caused by another war, the war against the COVID-19 pandemic that paralyzed the world economy for a time, until supply chains began to catch up.
It is difficult to imagine another time when wild animals wandered in the empty streets of major cities under lockdown.
In the words of CNN senior business reporter Alison Morrow, “Demand went from zero to 100, but supplies couldn’t bounce back so easily. Factories were on lockdown or navigating Covid-19 restrictions, and raw materials were harder to get because of the sudden swell in demand. Shortages of just about everything cropped up, especially workers to unload goods and drive them to their destination. We’re still untangling the mess at ports around the world.”
And there is another war going on, the Ukraine-Russia war, which is affecting the current spike in energy prices, and is the main reason for this month’s uptick in inflation.
West Texas Intermediate Crude, the U.S. benchmark, was near $88.58 a barrel on Wednesday, with traders focused on supply concerns following decisions by Saudi Arabia and Russia to cut crude supplies through year-end. WTI was trading at a low for the year below $65 a barrel in May.
So we shouldn’t forget such historical events do occur, but also that they have never lasted for long.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
No comments:
Post a Comment