By Erik Randolph for RealClearPolicy
May’s consumer price index (CPI) inflation rate was higher than expected, and the ripple effects are spreading widely. But by focusing so much on the inflation rate, we miss the big picture.
The larger story is that all this inflation is setting a new price level, guaranteeing a new high for prices in the economy for decades to come and further hurting the poor and working class.
The CPI rose at an alarming 8.6% in May from its previous 12-month level, a jump above April’s 8.3% rate increase and an indication that the inflation is heating up again and not cooling as many economists had optimistically predicted.
We now know for sure that early statements by the Biden administration and the Federal Reserve about the transitory nature of inflation were tragically wrong. The reality now is that inflation is embedding itself in the economy as businesses and investors build higher inflation into their strategies and workers are forced to make budget decisions and seek wage increases based on it. of the cost of living.
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As a result, federal policymakers are scrambling to raise interest rates faster — and likely even higher, as evidenced by this month’s 0.75% increase — in a bid to calm the tide. inflation.
But even if the inflation rate returns to the Fed’s target range, will the economy return to where we were before? The answer is no. This is because of the price level, defined for all intents and purposes as the new price “floor” in the economy. Inflation has been driving up the price level for months and Americans are taking it hard on their wallets. When the price level increases, purchasing power decreases.
What is both remarkable and troubling is the lack of discussion about the new price level among policymakers. The only discussion right now is about reducing the rate of inflation. That means federal policymakers seem content to leave the price level high. It will leave the poor and the working class even further behind, deepening the economic divide in our country.
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Historically, the price level in the United States has remained fairly stable, rising in times of war and falling in times of relative peace. That is, until we gave the responsibility of maintaining purchasing power to the federal government in 1946.
The annual price level has only fallen three times in this 76-year period since we handed over this responsibility to the government – once in 1949, another time when Dwight Eisenhower was president, and in 2009 at the end of “official” of the Great Recession. . Overall, the price level increased by 1,515% during this period.
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Here are two major reasons behind the extraordinary rise in the price level. First, our federal politicians continue to place economists who fear deflation in positions of power. These economists associate deflation with the Great Depression. There is no doubt that deflation occurred during the early years of the Depression, but deflation itself is not harmful and can indicate a healthy economy.
These deflation-phobic economists ignore the economic history of the United States when deflation coincided with some of the greatest periods of economic growth, extending the American dream to more low-income Americans as their standard of living rose. .
Second, our federal politicians don’t know how to stop themselves from spending more money than the government takes in revenue. Especially in times of economic prosperity, deficit spending fuels inflation.
The only way for a family to overcome a rise in the price level is to increase wages at or above the new price level. Some Americans are lucky enough to be going through this right now, but the distribution is uneven and unfair.
Rising income levels are highly selective and leave behind the majority of Americans, especially the poorest people, workers with less labor market power, low-income communities, older people living with fixed incomes and those preparing to retire.
Observers from all corners of the political spectrum are now realizing that our country is suffering from a severe economic hangover after years of pumping dollars into the money supply. Soaring commodity prices could soon begin to have a significant impact on consumer behavior, likely causing an economic slowdown and worsening employment situation, although inflation continues to be an issue.
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This would signal the return of the stagflation our country experienced in the 1970s.
The recipe for escaping this mess is simple but includes parts that aren’t pretty and are politically difficult: cutting federal deficit spending, contracting the money supply, and more aggressively adopting supply-side economic policies. This means policies that cut red tape to reduce unnecessary government regulations, making it easier for entrepreneurs to start and grow businesses and for investors to take risks by investing in businesses.
Syndicated with permission from RealClearWire.
Erik Randolph is director of research for the Georgia Center for Opportunity.
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