This is starting to sound like a broken record.
Time and again, in my columns for the last 10 months, I’ve been sounding the alarm about a very serious inflation problem. Since the federal government’s monetary and fiscal policy, coupled with their energy policy, has caused this inflation, it is up to the government to immediately take action, or inflation will worsen.
The Biden administration and the Federal Reserve (Fed) will both disagree with my assessment. They continue to claim that the inflation is caused by disruptions in the supply chain, meaning that it is a reduction in aggregate supply causing the inflation. As such, they note, as soon as the supply chain issues are resolved, inflation will simply go away.
That assessment is just plain wrong.
As of last July, the economy, in total was producing more total output than before the pandemic. Currently, the economy is producing about 2% more goods and services than before the pandemic. In total, we don’t have a supply chain issue.
The supply chain disruptions have affected imported goods as ships cannot be unloaded. Plus, there’s a lack of labor at the warehouses to accommodate the goods. Because of this, products made in China and elsewhere are in short supply.
But President Biden maintains that the supply chain disruptions have been greatly reduced. Despite this rhetoric, inflation keeps rising. Obviously, supply issues are not causing inflation.
As I have noted in previous columns as far back as last March, there are four reasons why we have inflation. All four are a result of failed government policy.
Energy & Wages
Rapidly rising energy prices are contributing to inflation. Energy prices are rising mostly because Biden’s policies are restricting the supply of fossil fuels. He did this by canceling the Keystone pipeline, banning drilling on federal lands and banning drilling off of the coast of Alaska.
There is also an issue with wage inflation. Mostly because the federal government gave free money to virtually every household, lower-wage workers can support themselves without working. In addition, government policy meant many workers did not have to pay their rent and there was no fear of eviction.
To lure those workers back, wages rose significantly. While that may be good for workers, it raises the cost to business which puts upward pressure on prices.
Wage inflation will worsen this year. Organized labor will note that inflation is 7.5%, so they will ask for a 10% raise to stay ahead of inflation. That leads to higher labor costs and fuels a wage-price spiral.
Irresponsible Spending, Monetary Policy
The Biden Administration continues to deficit spend, and Biden wants to make that even worse by passing his Build Back Better plan. By deficit spending nearly $6 trillion in the last two years, the excess demand has overheated the economy and led to more inflation.
And lastly, the shockingly irresponsible behavior of the Federal Reserve has resulted in monetary policy that continues to stimulate the overheated economy leading to more inflation.
For the years prior to 2021, the Consumer Price Index (CPI), which is the most accurate measure of inflation at the consumer level, usually increased by about 0.2% monthly. That meant inflation for the year was in the 2% to 3% range.
In January 2021, the CPI increased by 0.3%. In February the increase was 0.4%. In March the increase was 0.6%. And in April 0.8%. It should have been obvious that inflation would be a problem.
Yet the Fed did absolutely nothing.
Finally, by November the Fed said it would gradually reduce its bond-buying program and completely end it by March 2022. After that, the Fed will begin to raise interest rates. Unfortunately, by April, inflation will be at least 8% and possibly much higher.
Reverse Direction, Now
Since the inflation Americans are currently being subjected to is caused by government policy, it can be quickly reduced by reversing the counter-productive government policy.
The Biden administration will not reverse its energy, will not reduce government spending and will not stop its programs that give free money to Americans. So, it is up to the Fed to act quickly and decisively. The bond buying program must be stopped now and interest rates should be raised immediately, probably by a half of one percent.
Since the Fed is likely to stay the course and not raise rates until March or April, inflation will inevitably worsen.
The Fed’s top policy goal should always be price stability. For the economic security of all Americans, it should remember that as soon as possible.