Consumer Spending Is Not the Cause of the Current Inflation

Consumer Spending Is Not the Cause of the Current Inflation
A shopping cart in a supermarket as inflation affected consumer prices in Manhattan, New York, on June 10, 2022. Andrew Kelly/Reuters
Paul Craig Roberts
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Commentary 
In the United States, consumer spending is increasing not from a rise in income but from a rise in consumer debt. Last November, consumer spending financed by new debt rose at an annual rate of 7.1 percent, which exceeds the 4.8 percent annual growth in average hourly earnings for the month.

With wage increases lagging inflation, consumers’ real incomes are falling. If not the Federal Reserve Board and chairman, the Federal Reserve’s staff economists should know that falling real incomes are an unlikely cause of demand inflation. It’s a sign of stress, not exuberance, that consumers are having to go deeper into debt in order to make ends meet.

In a previous article, I pointed out that the current inflation is the result of lockdowns and sanctions, which reduced supply. Another factor is opportunistic behavior by companies. With the Federal Reserve and media harping on inflation, it’s an opportunity for companies to raise prices as the blame is placed on inflation and not on corporate behavior or greed. I have noticed in the food supermarket that I use that some prices haven’t risen at all, and others have risen a multiple of the reported inflation rate, with some doubling in price.

Previously, I argued that the Federal Reserve was trying to combat a supply-side inflation with ineffective demand-side measures. An alternative explanation is that the Federal Reserve is raising interest rates for reasons independent of inflation.

Perhaps the Federal Reserve is worried about the unintended consequences of the sanctions placed on Russia, which are having serious effects on Europe rather than on Russia. The sanctions have encouraged the move away from the use of the U.S. dollar to settle trade differences between countries, with the dollar’s use shrinking toward being the reserve currency only of the Western part of the world, while other parts of the world are beginning to settle accounts in their own currencies. A shrinkage in the dollar’s use lowers its exchange value relative to other currencies, and the Federal Reserve might see higher interest rates as a way of supporting the value of the dollar. A lessening of the dollar’s use as a world reserve currency might explain the decline in the dollar index from 114 last September to 102 on Jan. 13.

Alternatively, the Federal Reserve might see higher interest rates as an inducement to foreigners to continue to finance the massive $1 trillion-plus U.S. budget deficits by purchasing U.S. Treasuries.

When the Federal Reserve makes mistakes as it did when it caused the Great Depression by allowing the U.S. money supply to shrink, or when financial speculation threatens the system with bankruptcy requiring Federal Reserve rescue, it’s the people who suffer the consequences.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Paul Craig Roberts
Paul Craig Roberts
Author
The Hon. Dr. Paul Craig Roberts is an economist, former assistant secretary of the U.S. Treasury, and Wall Street Journal editor.
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