Inflation Has Returned

Commentary After some encouraging news last summer and fall, many began anticipating a quick end to the economy’s inflation problem. Federal Reserve (Fed) Chair Jerome Powell even suggested that he might not have been so wrong in 2021 when he declared the inflationary pressure “transitory.” The news from January contradicts this optimism. The Labor Department reported that consumer prices rose 0.5 percent in January, 6.2 percent stated at an annual rate, and that producer prices rose by 0.7 percent, 8.7 percent stated at an annual rate. Neither says anything good about the inflation situation. Of course, one month’s data alone does not make a trend. But there is ample reason to expect more such troublesome inflation news when the January report is set against the pattern of 2022—both its periods of intensity and relief—and the detail behind the summary figures. That news will demand still more counter-inflationary policy from the Fed and, hopeless as it seems, some support for counter-inflationary policies in Congress and from the White House. One reason to expect future trouble lies in the pattern of energy prices. The January consumer price index (CPI) showed a 2.0 percent rise for the month, 26.8 percent stated at an annual rate. This jump reversed much of the relief reported in previous months. To be sure, energy price moves are notoriously volatile. The import here comes from juxtaposing these price trends and Russia’s recent decision to reduce supplies. At base, Russia’s moves have less impact than the White House frequently suggests. After all, energy prices during this past year have gotten better and worse even as Russia’s position and the Ukraine fighting have continued uninterrupted. But if Russia’s announcement will have ill effects, it is yet to appear. It is too soon to say that it appeared in the reported energy price inflation. The same is true of the 5.0 percent January rise in producer energy prices. This means that any ill effects of Russian action will occur just as the recent surge at the producer level works through to retail pricing. Also suggesting future inflation problems is the picture that emerges from the major components of the CPI. Food prices, for example—both groceries and restaurant meals amounting to some 13.5 percent of the average household budget—rose 0.5 percent in January, bringing the increase over the last 12 months to over 10 percent. The price of shelter—rent and ownership and more than one-third of the average household budget—rose 0.7 percent in January, bringing the rise over the previous 12 months to about 8.0 percent. Not every subcategory of the CPI rose. The prices of new cars and trucks rose a relatively moderate 0.2 percent in January, but most other important parts of the index did rise too much. Apparel prices increased 0.8 percent in January, and the prices of transportation services rose some 0.9 percent. Perhaps even more telling of future price pressures is the pattern exhibited by what might be described as the pricing pipeline. As already indicated, the overall measure of producer prices in January outpaced the consumer measure. The producer picture does indicate some relief on grocery prices. Producer food prices declined 1.0 percent in January and even more at the farm level. The crude energy process also declined some 16.2 percent, though, with Russia’s decision to cut back production, gasoline prices on commodity markets are rising again. Otherwise, the prices of finished producer goods increased rapidly. Durable producer goods—appliances, cars, and the like—rose 0.5 percent in January, and the prices of non-durable goods—soap, cosmetics, and the like—rose some 0.9 percent. Construction costs rose 0.8 percent, suggesting little immediate relief in the cost of shelter. On these bases, inflation seems set to continue. It cannot lift easily because, at base, it has little to do with the usual excuses offered by Washington—corporate greed and Russia’s maneuvers. Instead, the nation will continue to suffer inflationary pressures because the Fed in 2020 and 2021 orchestrated a huge surge in money creation. Whenever money growth exceeds the economy’s ability to respond, the result is inflation, if not immediately, then ultimately. Between December 2019 and February 2022, the Fed’s broad definition of money circulating in the economy (M2) rose almost 42 percent, nearly 20 percent yearly. No economy, especially one as large and well-developed as the United States, can keep up with that. This disparity lies at the root of today’s inflation and tomorrow’s, too, until the Fed’s otherwise admirable recent counter-inflationary policies remove it. That will require more effort over more time. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.