The New Normal of High Prices

Consumers shop for meat at a grocery store in Annapolis, Md., on May 16, 2022. Jim Watson/AFP/Getty Images

Commentary

Beef eaters got some good news over the past several days. Prices are starting to relax a bit for the higher-end cuts. They had become so unaffordable over the past six months that even the most devoted fans of New York strip and fancy filets switched to cheaper roasts and ground beef to satisfy their cravings.

We don’t have to eat bugs just yet!

The hope that this represents a trend is easily dashed, however, when you notice that the price of ground beef is still up 27 percent over the pre-lockdown cost—roughly in line with the price of meat in general—while the prime cuts are up a whopping 32.8 percent. Imagine that: The prices of prime cuts need to fall by a third before we can live in the dream world of 2019 again.

In other words, we are nowhere near back to normal. The intensification of the pain in one class of goods has been reduced. And that is mostly in response to a shift in demand, the substitution of lower-priced cuts from higher-priced beef.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

While this is good news for some consumers, it isn’t really a sign of anything good overall. And sadly, we are going to have to get used to this.

I’m fascinated by the evolution of psychology around the current inflationary recession. It’s puzzling because most of us can’t remember ever having lived through such a thing. Most people I know are expressing nonstop shock at prices on the shelves and for cars, housing, and gas. But these same people aren’t ready to recognize the terrible reality that there will be no going back.

Yes, prices for some goods will fall and others will rise. Gas prices are down (for now) while electricity prices are up (for now). That hits our utility bills very hard, which you might already have noticed. Another bill, another shock. We keep being alarmed by this because we have lived through mostly stable prices for most of our lives, only climbing enough to stay with standard-of-living increases such that it’s not been too much of a bother.

However, we now have real household income—that is, adjusted for inflation—falling off the cliff month after month, with no end in sight. People are keeping hope alive with the belief that all of this will go away. This simply won’t happen. To restore what we remember as normal prices wouldn’t require that the Fed reach its target of 2 percent; restoring the pricing world of 2019 would require an overall decline in prices by 14 percent.

That isn’t in the cards, at least as a matter of policy.

In other words, barring some dramatic deflation—which Washington would do everything possible to prevent—the new prices in general are the new normal. You could see this on Biden’s face when he announced to the world that last month’s Consumer Price Index was flat for the month, owing to the big decline in oil and gas. To this administration’s way of thinking, a continuation of this trend solves all problems.

Here’s an analogy: Let’s say you gain 40 pounds in the course of a year. You decide to diet. You hop on the scale month after month, but there’s no change up or down. You decide that is a victory because you have stopped putting on weight. And sure, that’s best, but it isn’t possible to declare your weight-loss campaign to have been a triumph.

All during this inflationary period, we’ve wondered how much of this change is induced by supply-chain breakages, market dislocations, and miscoordinations, plus perhaps the Ukraine war, versus old-fashioned monetary depreciation. That matters not only for discovering the cause and effect, but also for forecasting what we can reasonably expect in the future.

If it is a supply-chain issue, it’s fixable, though not easily. Remember when the backlogs at the Los Angeles ports were “transitional’?’ They would go away, thanks to a few calls from the White House. Indeed, the problem did get better—because shippers started to move their goods through New York, Savannah, and Houston! Now, those ports also are experiencing clogs too.

In this case, we really do have a problem that mainly owes to the issue of timing. When governments shut down economic life for a virus, shipping and inventory schedules flew into chaos. Months were lost while ports were empty. Once markets opened up again, everyone rushed to make up for lost time and the ports couldn’t handle the traffic. They are still, in general, running months behind, which creates price pressure.

This is a fascinating example because it illustrates a general point. Politicians and bureaucrats can stop people from doing things but they exercise no power over the passage of time itself. The forward motion of time is relentless and unstoppable even by powerful governments with mass prestige and weaponry. And economic functioning isn’t just about accounting and marketing; it is also about the wise management of the scarce resource called time.

That aside, there is every reason to believe that the inflation we’ve endured really does have its roots in monetary phenomena. In raw terms, the supply of money as measured by M2 increased by $6.3 trillion over two and a half years. That money wasn’t stuffed in bank vaults like in 2008; it was made spendable through direct subsidies to producers and consumers. That’s called devaluation and it’s as old as the ancient world.

Another example of this is from the housing industry, which is currently in upheaval. Supply is up while demand just keeps falling, while construction costs are rising still further.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

What’s supposed to happen under these conditions? House prices are supposed to fall so that the market can clear. That isn’t happening. In fact, quite the reverse. They have become more unaffordable than ever. That’s what you get in an inflationary recession.

Nothing seems quite normal and that inspires a loss of confidence in consumers and producers.

Every day, we see new signs in the United States and also in Europe that economies are weakening even further, confirming the reality that Washington currently denies, which is that we are living in recession. They hang on to one piece of data to make the case: the unemployment rate. But this also is a false reading since labor participation is falling alongside labor/population ratios. The increase in jobs is largely due to existing workers taking second and third jobs.

The innumeracy of public opinion was revealed during the pandemic and the advocates of lockdowns used that to their advantage to confound the public with a blizzard of scary numbers that actually meant next to nothing. The same thing is happening as our economic lives gradually fall apart; there is always some big shot in D.C. ready to claim that what is clearly happening isn’t actually happening at all!

The time will come when Washington will announce that its war on inflation has been won. And we’ll look around and see that everything in general is on average 20 to 25 percent more expensive than it was just a few years ago.

We are being pillaged, while they call it successful economic management.