While Beijing pretends that China’s debt problems are manageable, Washington pretends that the country’s building inflation problem will simply go away. The leadership of each country is kidding itself.
This column has already described the dangers of China’s debt problems. America’s inflation presents dangers of a different kind. The data make it painfully clear that there is trouble. Claims that the price acceleration is “transitory,” issued variously by President Joe Biden, Federal Reserve Chairman Jerome Powell, and Treasury Secretary Janet Yellen, have become a dark joke among financial professionals, business leaders, and the public generally.
All the latest price measures tell similar and troubling stories. The Labor Department’s consumer price index rose 0.4 percent between August and September, almost 5 percent at an annual rate. So far this year, this broad measure of the cost of living has risen at better than a 6 percent annual rate, well above the Fed’s informal preference for 2 percent inflation and faster than any time in the past decade and a half.
Worse for a society that seems these days obsessed with inequity and protecting its most vulnerable members, the burden of this price pressure has fallen most heavily on the least well-off. Food prices, for example, have risen rapidly, jumping 1.2 percent in September, at a more than 15 percent annual rate. According to the Labor Department, food absorbs some 14 percent of the average American’s budget, but that proportion is much higher among lower-income people.
If that weren’t inequitable enough, energy costs have also led in this inflationary surge. In September, the cost of all kinds of energy—gasoline, heating oil, natural gas, and electricity—rose some 1.3 percent, an almost 17 percent annual rate of gain. Energy prices have risen more than 40 percent over the past year. These constitute almost 8 percent of the average American’s household budget but, as with food, a much higher part of the expenditures of poorer individuals and families.
Worse still, fuel oil prices rose 3.9 percent in September, at a more than 50 percent annual rate, while heating gas prices jumped 2.7 percent, almost a 40 percent rate. Just keeping warm as temperatures drop will burden all, but especially the poor who dedicate much more of their income to these purchases.
The only major category in the Labor Department’s accounting that showed substantive price relief was airline fares. These fell 6.4 percent in September. Were it not for this drop, the overall consumer price index would have recorded a 0.8 percent increase for the month, some 10 percent at an annual rate. Though in some circumstances, the drop in airfares might offer comfort, it’s apparent that the price decline is purely a response to the sudden drop in traffic due to the rise in infections from the Delta variant of COVID-19. There can be little doubt that as the rate of infections abates, as it already has, travel and airfares will again begin to increase.
Washington has explained this rise in the cost of living entirely with references to supply chain problems. No doubt, some of the price pressure does reflect interruptions in production and shipping. These will surely dissipate in time, but they will not go away any time soon. Even as supply chain problems ease, prices will not fall. Americans, especially poorer Americans, will have to carry the burden of heightened living costs into the future.
What makes the picture still more sinister is that the inflation may well also have a more lasting and fundamental cause. Washington seems willing to ignore this matter, but it remains a fact that policy, especially monetary policy, has persisted on an inflationary path for some time. Republicans these days point to Biden’s efforts to increase federal spending to unprecedented levels. That spending doesn’t help, but the problem goes deeper.
For more than a decade, federal spending and deficits have risen at a pace far beyond historical norms. What is still more dangerous from an inflationary standpoint is that the Fed has purchased a good portion of the expansion in federal debt, $5 trillion cumulatively in fact since 2009, $3.2 trillion in just the past year. These purchases have flooded the economy with financial liquidity and money, effectively financing the government with the printing press.
This kind of monetary flow has, according to economic theory and history, always led to inflation. Those who have researched these links note that the lags from a monetary expansion to inflation are often long and always variable. Now that the price pressures have become evident, there is reason to suspect that those long lags have finally caught up with the economy.
Perhaps the country will avoid what history and economic theory suggest it’s in for. Perhaps Biden, Powell, and Yellen will be vindicated, and the inflation will soon dissipate. Even so, Americans would still have suffered increased living costs as well as added costs until that relief arrives.
In the meantime, there is ample reason in past monetary policy for concern that this matter will last longer and cause still more harm than Washington seems willing to admit.
