For anyone following price trends, there was nothing particularly surprising about this week’s report on consumer prices. They came in hotter than expected. This makes sense. The money stock is generally up, with velocity on the rise. Real-time prices are rising again. The Federal Reserve recently lowered rates. The Fed didn’t call it “quantitative easing,” but that is what it is.
Clearly, the excesses in money printing over the past four years have not yet been mopped up, and that is showing itself in price increases some 50 percent above the Fed’s official target.
I like to play a mental prediction game when these data releases come out. Before this report was released, I had dug through the spreadsheets to see that energy prices were down and food and transportation prices were up, and that everything else was chugging along in ways that keep reducing the U.S. standard of living.
In my mind, I thought, “I bet they will report that inflation is cooling.”
How did I know? That’s what the major media has said for three years. “Cooling” is the go-to word because it is imprecise enough to be nearly meaningless. It’s a safe term, and sounds much better than the proper headline: “Hot Inflation Higher Than Expectations.”
Sure enough, The Wall Street Journal went there: “Inflation Cools in September.” So did The New York Times: “Inflation Cools Slightly.” An hour later, the WSJ rethought and changed its headline to “U.S. Inflation Is Cooling More Slowly Than Expected.” Then it changed again: “Inflation Continues Its Bumpy Decline With Mixed September Reading.”
My favorite of all came from The Associated Press: “US inflation likely cooled again last month in latest sign of a healthy economy.”
It took nearly all day before the journalists themselves realized that they had once again been fooled by the press release.
Try to understand this temperature metaphor. It’s hot in the room, so you turn on the air conditioner. Someone says, “It’s still hot.” You say it’s cooling. Someone else says it’s still hot. You say it is cooling more slowly than expected. You might respond: The air conditioner does not work.
Indeed, the anti-inflation campaign of the last three years has not worked.
Producer prices, which reliably predict future trends in consumer prices, are also reaccelerating after having calmed down a bit last year.
If we had experienced inflation on this level five years ago, there would have been shock and alarm in the air. People would have been screaming about how the one-month rate had tripled and the year-over-year rate doubled. There would have been a frenzy of concern.
But after what we’ve been through, reporters now routinely call inflation on this level “cooling,” even though they have said this for three years as the dollar has lost at least 20 percent of its value (and more likely 40 percent). This really needs to stop. Surely the headline writers can be more accurate and descriptive rather than propagandistic.
The reaction to the study has been predictable. There is shock on the one hand, but not because of the conclusions. Everyone knows that inflation is far worse than the government claims. The shock is that someone finally said what needed to be said.
There are thousands of institutions that might have commissioned this study. There are hundreds of thousands of working economists out there. The trouble is that none of them gain any reward from contradicting falsehoods that come from agencies. All the incentives encourage the opposite.
As with public health and medicine, the industry of economics as a profession tends to have an internally self-reinforcing story. When an outlier comes along and says otherwise, it is a bit like the boy who points out the emperor is not wearing any clothes.
One of the widely believed doctrines in the world of economists is that deflation is always terrible because it indicates economic decline. Economists have generally believed this since the Great Depression. It stems from a basic error about cause and effect: the belief that falling prices will drive lower output rather than correct it. As a result, economists have long been more sanguine about inflation than they should be.
This puts many mainstream economists in the awkward position of opposing what most people actually want, which is lower prices. This is especially true after four years of unrelenting and grueling inflation that has so dramatically lowered purchasing power. Who wouldn’t want to go back to 2019 prices?
Sadly that is not going to happen. Even if inflation falls below zero temporarily, there will be panic at the Fed and among professional economists as if something terrible is happening. This has no basis in fact or in history. The price of software and computer memory experienced declines on the level of 90 percent over several decades even as the industry boomed. In the late 19th century, a general and gentle deflation in all goods and services took place under a strict gold standard, and this coincided with the largest rate of economic growth ever seen.
Ruling out the possibility of going back to the prices of five years ago, the least we could ask is that prices stabilize now and in the future, so that we can work toward regaining some of the prosperity that has been taken away from us. For that matter, it would be nice to have some honesty about how much inflation there has been.
Sadly, things are not trending in the right direction. Real-time inflation measures suggest a reacceleration. Money stock levels are rising, and are currently at an 18-month high. The Fed is cutting rates in response to demands by Wall Street for looser credit and lending standards. All of the trends point one way: We are experiencing higher prices. Indeed we might be headed to wave two, consistent with the experience of the 1970s. No one wants to see what wave three looks like.
If this is true, the next administration is going to have a serious problem on its hands. There will be no way to fix inflation by attacking retail prices directly with anti-gouging laws or price controls. Nor is more drilling going to fix the issue. There will be no choice but to go to the real source of the problem. The money printer itself needs to be unplugged. And, yes, doing so will disrupt production structures and investor expectations. It could even bring about a deeper recession.
At some point, this economy has to right itself, face the truth, and start standing on its own without the constant infusions of money and credit that are showing themselves in higher prices.
