Tired of it yet? Month after month, now going on more than three years, muckety-mucks with the government and the Fed, echoed faithfully by legacy media outlets, have kept assuring us that inflation is improving and effectively defeated. It keeps not improving and it surely isn’t defeated.
The consumer price index (CPI) is said to have “eased” to 3.4 percent annualized, but by normal standards of four decades back, this is hot and terrible, still eating away at purchasing power and the U.S. standard of living.
The producer price index (PPI), which gets far less attention than the CPI, even though it is a better forecast of the future, just clocked in at its worst reading in twelve months. I’ve been rather pessimistic about inflation, but this news comes as a shock even to me.
It’s bad, folks, really bad.
The trendline is showing a clear pattern of reacceleration. There is no denying it now.
Keep in mind that the PPI foreshadows consumer prices by about three months. It makes sense because of the length of production structures from many layers of wholesale prices all the way to the consumer marketplace. This is how complex capitalistic structures operate, with a time structure of production. The yield curve, which maps the borrowing rate based on increments of time, reveals the same. It’s the whole basis of modern prosperity.
But when the value of money is systematically watered down by the authorities through money printing (bond buying), the price pressure bleeds through the entire production structure. Passing on the higher costs and lowered purchasing power becomes an accounting nightmare, like a hot potato passed from one stage to another.
Consider your local pizza parlor. You see the prices on the menu. What you don’t see are the labor costs, energy costs, wild and shifting costs of ingredients, costs of oven repair, replacement costs for other equipment, costs of rent and physical maintenance, health insurance costs, advertising costs, website operation fees, and so much more.
The only way this system can work from an accounting point of view is by the revenue flowing from consumer purchases back through the extremely complicated market structures that go into making the box of joy appear before your eyes.
When the prices of everything are rising, the scramble is on to find a way to keep the company in the black. The pizza parlor would like to absorb as much as possible rather than test consumer tolerance for higher prices. But at some point, they must move against the final purchasers, knowing full well that this is going to affect the demand for the product.
Running a business is hard enough, but such accounting challenges add multiple new layers of frustration and challenge. In this latest round of inflation, we’ve noticed that restaurants have tried to hide inflation in drink prices, simply because of one well-known fact: The demand for beer and wine is less sensitive to price changes than demand for the food itself. That’s why such prices have gone up so much at restaurants but much less so at liquor stores that sell directly to the consumer.
But such tricks only last so long, especially when the inflation is persistent. The next stage is the great trick over user fees. You get server fees, music fees, seating fees, online ordering fees, and much more. You also get smaller pizzas, less high-quality ingredients such as meat, plus more dough, and perhaps slower service because of cuts in labor costs. The whole experience becomes degraded.
You have surely sensed this. During stable money times, we had come to think of enterprises as friendly benefactors. They were there to bring us great products and services at fair prices. Now, we approach them all with suspicion. We notice all kinds of hidden fees and degraded services and sense that we are always getting our pockets picked.
It’s annoying, but keep in mind that this isn’t the fault of retailers. They face rising costs, too. They, too, are being pillaged, and they have to survive. So they, too, are looking for ways to hide their higher costs. No sooner than they find some way to get by for another month or two, people figure it out and start to revolt.
This is why we are seeing so many sudden closures of restaurants. Red Lobster just announced the closure of dozens of its restaurants in response to inflationary pressure. Starbucks, too, is bleeding red, and investors know it. No one knows how far this will go. Even Walmart is cutting corporate jobs.
It helps not at all for the Biden administration to issue periodic threats of a crackdown on shrinkflation and hidden fees. Sure, it would be nice to live in a world without inflation, but that is not the world birthed by Federal Reserve policies that printed nearly $6 trillion in new money over 18 months.
That disaster had to end up in lower purchasing power for the dollar. The transition is still ongoing, with precious little of the inflationary bout sponged up by higher interest rates, contrary to promises.
The danger we face right now is the awesome possibility that we might only have been through the first big wave of inflation and we are now headed into another, just like what happened in the 1970s. In those days, every time inflation fell, the masters and commanders of the money stock assured the public that the worst was over. As it turned out, the worst kept happening.
The Fed has provided no assurances through its policy program. It is still talking about cutting rates sometime in the summer or fall. This will cause a reacceleration of money velocity and hence more inflationary pressure. And it is manufacturing ever more excuses for loosening money and credit, most recently under the guise of climate action.
Make no mistake: This is nothing but a surreptitious method of taxing the public. The bond dealers, the big bankers, the governments, and the large corporations may benefit, but the rest of us are left with the bill. We have to pay rent, buy groceries, foot repair bills on cars, and pay tuition. There is no getting around it. Upward price trends end up only reducing median household income in real terms. In other words, it only makes us poorer overall.
By now, you have surely lost trust in the Fed officials who have promised us better times over three years, even as the plight of the household has become grim. Consumers are starting to break, as we know from watching retail closures and pain on the part of small businesses, which have been pummeled as never before over four years of hell.
This inflation is eating out the substance of growth and prosperity. It is not getting better. It is getting worse.
