A second look at the prospects for persistent price inflation in our future.

The blog post I published this past week about reports of recent price hikes and what this might portend for the future has sparked some interesting feedback and comments.  Based on that feedback, it appears that feelings are mixed on whether we’re poised to  be entering a period of prolonged inflation. 

Responses from two people in particular are worth highlighting for the “countervailing views” that they espouse.  I think both have merit.

The first response came from my brother, Nelson Nones, who has lived and worked outside the United States for decades.  His perspectives are interesting because, while fully understanding domestic events and policies, he also brings an international orientation to the discussion due to his own personal circumstances.  Nelson is looking to history for his perspectives on the inflation issue, offering these comments:

The chart below shows annual U.S. CPI percentage change for the past 106 years:

Note:  See https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/ for source data.

Projecting the latest (April 2021) Consumer Price Index forward to an entire year suggests that the U.S. will experience a 3.1% inflation rate in 2021.  That would be higher than in any year since 2011, which was a bounce-back year following the Great Recession.  Otherwise, the generic inflation trend has been consistently down since 1982 (nearly 40 years).

If the historical trends are any guide, and if we are indeed entering a persistent inflationary phase, it would take another decade before inflation growth approaches the levels seen during the 1970s.

But I think the likeliest scenario is experiencing a sharp uptick this year due to pent-up demand following the COVID-19 pandemic that will causie spot shortages, followed by resumption of a downward trend over the following ten years or so.

That’s similar to the pattern you can observe in the chart [above] during the years following the end of World War II, which had also created massive pent-up consumer demand.

Consider that the coronavirus pandemic hasn’t really altered the underlying economic fundamentals. The past 40 years has witnessed an explosion of manufacturing capacity in China and other developing countries, and that hasn’t gone away.  Meanwhile, dependency on oil — a key driver of inflation in the 1970s — has shrunk due to improved energy efficiency and aggressive exploitation of renewable energy resources, which for all practical purposes are in infinite supply.

Another factor, which doesn’t get as much attention as it probably should, is declining birth rates and aging of the population on a global scale, leading to a slower rate of population growth in the future that may constrain demand for consumer products in comparison to the past century. Let’s face it — we old farts just don’t consume as much as growing families do!

So yes, we should keep an eye on inflation — but I don’t think we’re in for a repeat performance of the horrible 1970s.

Echoing Nelson’s thoughts are the perspectives of another business veteran — an editor and publisher who has been intimately involved in the commercial/B-to-B field for decades.  Here is what he wrote to me:

I don’t want to get into a public debate with the inflationistas because I will never convince them that this is likely not a replay of the 1970s and early 80s inflationary period pre-[Paul] Volcker.  (Speaking personally, I didn’t own a house until I was 42 for the very reasons you cited in your blog post, and I was just a lowly editor back then.)

What we’re seeing today is simply the price shock of suddenly soaring demand, aggravated in the case of some commodities such as steel by Trump-era tariffs.

All commodities are tied to the price of crude oil, the most volatile of all commodities, which is long-denominated in U.S. dollars. WTI crude pricing is now at around $63 per bbl. — about where it was in early 2020 before the pandemic hit. It went negative for a time during the worst period of the crash in worldwide demand that was brought about by the pandemic. Tanks couldn’t be found into which to put the excess crude coming out of the ground from U.S. fracking. Traders freaked out, as they sometimes do.

So naturally, the percentage changes today look jaw-dropping. I can go through all the other commodities mentioned in your post and provide simple explanations as to why each is currently on the rise. Logistical bottlenecks are a big problem with everything — but as with oil, most of the issue is the sudden surge in demand as the pandemic winds down even as production and logistics aren’t yet prepared to fulfill the need.

In other words, the situation has very little to do with government spending — especially since most of the infrastructure money isn’t even allocated, let alone spent. Also, the Biden administration has yet to raise a single tax. It can’t. Only the House Ways and Means Committee can initiate tax changes, and those must then go through the Senate to become law. Senate Minority Leader McConnell and his allies have made sure nothing has gotten through.  

Of course, it never hurts to keep an eye on things — especially with structural inflation as you noted in your article.  But it’s important to look also at other, broader data. The Producer Price Index in April did reflect the increase in commodities prices, but the Consumer Price Index, even though it had a month of robust increases, remains below 3% annualized. And the Personal Consumption Expenditure Price Index, which is what the Fed pays attention to the most, is still tracking under 2% on an annualized basis. (A little inflation can be a good thing, actually.)

On the income side, average wage rates aren’t rising; they’re more likely to be falling in the future as low-wage service workers, including those in foodservice, re-enter the market.

So in my view the things people see with inflation are most likely short-term issues. Let’s look at it again in six months to a year. I’d also suggest that people read economist Paul Krugman’s columns in the New York Times for a bit of perspective that’s counter to the views of the inflationistas, if only for balance. The monetarists have been wrong since Volcker squeezed out the inflationary spiral. It was painful, though — so we’ll want to keep an eye on things.

Considering the views put forward above, I think it’s fair to conclude that “the jury’s out” on whether we’re actually entering a prolonged inflationary period.  If you have additional thoughts or perspectives to share on either side of the issue, I’m sure other readers would be interested to hear them.  Feel free to leave a comment below.

One thought on “A second look at the prospects for persistent price inflation in our future.

  1. The last time stagflation crept up on us, Keynesianism was a new toy — a supposedly magical spending policy where deficits wouldn’t matter “since we just owed the money to ourselves.”

    One government after the other in the 1970s drank the Kool-Aid® and began deliberately overspending; Sweden nearly destroyed its economy with inflation. Chile did. Willy Brandt’s Social Democrats created the same syndrome in Germany. Keynesians might as well have been on crack.

    Paul Volcker’s painful 1980s solution –high interest rates, matched by a similar severity in other countries — taught central bankers and politicians a lesson: The cure was nearly as painful as the disease.

    Ever since, politicians have (of course) overspent. That’s what grandiose egos do. But no politician or central banker believes any more that going into debt is a form of virtue. Budget balancing is now a more serious part of the way both the world and our country functions. It’s required of many state governors, for instance.

    In Washington, hope springs eternal for creating “multiplier effects” from a single dollar. But the level of magical thinking and idiocy these days is lower than it once was. We’ll probably avoid hyperinflation. Even the Marxists seem to know it spells trouble — Maduro in Venezuela perhaps being the exception.

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