Consumer price inflation is back, we have to accept it

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The consumer price index increased, in December 2021, by 7.0% compared to the figure posted in December 2020. The price index increased by 6.8% in November, as inflation fell all the months. The 7.0% rate is the fastest rise in consumer prices since 1982.

Core prices increased by 5.5% in December 2021, compared to 4.9% in November.

Until recently, rising inflation was seen by many as a temporary increase, created by Covid-19 disruptions, supply chain issues and other micro-issues that generated an adjustment in prices. short term price.

Today, experts and policymakers are not so sure that the rise in inflation will only be temporary. What they are up against is the fact that inflation was relatively latent in the economic recovery from the Great Recession.

This last recovery period lasted from June 2009 to February 2020, almost eleven years. Inflation during this recovery period turned out to be a compound annual rate of 2.3%. This inflation rate was very close to the policy target of the Federal Reserve System which was 2.0%, more or less.

The expectation for the current period of economic recovery was that the inflation rate would remain relatively modest, around the level reached after the Great Recession.

The Federal Reserve maintained its policy objective of achieving a target inflation rate of 2.0% with perhaps some errors on the upside to ensure that the recovery will take place. But, something seems to have happened. Consumer prices are not following the pattern of the last period of economic recovery.

Credit inflation

We are experiencing a different type of behavior in the current period. The previous period of economic expansion was dominated by government policy which produced what I have called “credit inflation”.

But this period of credit inflation didn’t just happen in the 2010s. The period of credit inflation, I believe, began in the 1960s when the U.S. federal government focused its fiscal policy and policy currency on creating a continuously expanding economy.

The thought behind this effort was called the Phillips curve. The idea was that the government could achieve lower unemployment rates if it was willing to accept a slightly higher rate of inflation.

The drop in the unemployment rate has been good for the government as the drop in unemployment rates has helped sponsor politicians get re-elected. Thus, in the mid-1960s, the government aimed to support modest rates of inflation aimed at reducing the amount of unemployment in the economy.

In the 1968 presidential election, Richard Nixon came out in support of the program and pledged to continue its efforts throughout his term as president. Broad policy became bipartisan policy, as supporting lower unemployment rates through slightly higher inflation rates became the property of the Republican and Democratic parties.

But credit inflation did one thing very well. This caused the prices of the assets to rise and if one invested wisely there was little risk in investing in these assets because over time the increases in the prices of the assets were there for the taking.

Sophisticated investors saw the opportunity and took massive advantage of it. These investors began to put more and more federally generated stimulus money into assets rather than equity investments, as they had done before. Investing in capital investments was more risky because economic fluctuations were greater than those in asset prices.

By the time we reached the 1990s, more investment money was going into the financial circuit of the economy than it was going into the real sectors of the economy. Prices for stocks, housing, commodities and other assets have risen more steadily than consumer or wholesale prices.

In the 2000s, the proportion of money entering the financial circuit increased further.

We come to the 2010s. During this period, even Federal Reserve Chairman Ben Bernanke crafted Fed policy to stimulate stock price increases to create a wealth effect that would generate capital spending. consumption, which would drive the economy forward.

Economic growth during this period was very modest while stock prices increasingly reached new all-time highs. And consumer prices have only increased by 2.3% per year.

Credit inflation dominated the scene.

Now we have a new situation

The past two years have generated a different picture.

The spread of the Covid-19 pandemic, the accompanying economic recession, the federal government’s efforts to provide cash to those in need to lessen the impact of economic disruptions, and the efforts of the Reserve federal government to prevent a major economic downturn have generated a new environment.

We now have a new environment. First of all, there are huge sums of money circulating all over the country. The Federal Reserve didn’t just try to prevent a deeper downturn. The Federal Reserve wanted to make sure nothing amazing happened on the downside.

The Fed, for about 20 months, bought $120.0 billion worth of securities, purely and simply, for its portfolio. It’s $2.4 trillion. That’s over 2 1/2 times the size of the Fed’s balance sheet before the Great Recession began!

Commercial banks now have over $4 trillion in excess reserves. Debt floods the country.

Second, most sectors of the economy are experiencing some form of imbalance. The pandemic, recession, supply chain issues, changing technology, changing labor market have generated disruptions in almost every area of ​​the economy. Adjustments need to be made.

One of the ways adjustments are made in a capitalist economy is by varying prices. And the prices started changing everywhere. But price variations go from one sector to another through a general effort to raise prices.

And, as these micro-changes occur, with all the money flowing through the economy, businesses and individuals translate their imbalanced situations into price hikes to address any distortions in the economy. economy.

In other words, consumer price inflation is back and just beginning to restructure the economy. Credit inflation continues. We see the stock market continuing to produce near new all-time highs. We see real estate prices skyrocketing. We see the prices of other assets continuing to rise.

But now consumer prices are rising. “Real” inflation is back. And, the money is there to guarantee a real push of “real” inflation.

I find it hard to believe that consumer price inflation, once started and with all the money around, will moderate. There’s enough money ‘out there’ for credit inflation to continue and consumer price inflation to continue.

That would mean the Federal Reserve faces a very, very messy job.

However, consumer price inflation is back and I don’t think it will recede anytime soon.

About Alma Ackerman

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