Is Inflation Here to Stay? 

The Bureau of Labor Statistics recently revealed how the consumer price index (CPI) rose 5% in May, as measured on an annual basis. This compares to an average annual rate of inflation over the last decade of less than 2.0%. Is price inflation becoming as scary as it looks?  

As economists like to say: It depends. CPI inflation is calculated by comparing this month’s CPI value with the CPI value one year ago. Last May, the nation was in its second month of a pandemic lock-down, with retailers having inventory fire-sales and laying off workers. This implies that the inflation indicators for May are somewhat biased upward.  

Surging goods prices may be attributed to fat stimulus checks encouraging recently vaxxed households to quickly release their pent-up inner shopper. As the recovering labor market slowly ramps up production, this bump in consumer prices may well be a temporary uptick. At least, that is what Treasury Secretary Yellen and Fed Chairman Powell have been telling the media.

Yet, the consumer’s short-term inflationary pain is still real. After global computer chip suppliers failed to meet the fast-recovering demand from the auto industry, Chevy announced it will temporarily idle tens of thousands of autoworkers. Ford, too, announced it will manufacture over one million fewer vehicles this year. Fewer cars mean higher sale prices.

Realtors are revealing how pent-up demand for a fixed supply of residential homes is allowing home sellers to receive multiple offers at tens of thousands of dollars over their asking price. In fact, home sellers often require bidders to submit a personal letter of introduction, ensuring that their family will be a good fit for the home and the neighborhood. (How does THAT residency requirement enter the government’s statistics?)

So, once lagging supply finally ramps up to meet fervent consumer demand, the pain of rising prices should soon recede… right? Well, again, it depends on if supply indeed ramps up again.

Generous federal subsidies to state unemployment payments have lengthened the average time it takes an unemployed worker to return to employment. The U.S. Department of Labor announced that weekly unemployment claims are now still over 370,000. This is almost twice the number reported in pre-pandemic January of 2020. Yet total job openings, which ran consistently around 7 million over the two years prior to the pandemic, are now over 9 million and rising. 

Further, the Biden administration is talking about raising the corporate income tax—not only in the U.S. but also acting as a member of a corporate tax rate-fixing cartel involving all the G-7 governments. This reduction in tax policy competition between countries will reduce the incentive for multi-national American corporations to expand their production lines and payrolls over the long run.

While both U.S. economic policies may be intended to address the need for greater equity across American society, this effort is not without significant economic costs. The “price” to pay for such policies will likely be sustained inflation across the American economy. Pun intended. 

 

 

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