What It Means for Inflation to Be Embedded

People shop at a grocery store in New York on May 31, 2022. Samira Bouaou/The Epoch Times

News Analysis

Every economic press release these days is an exercise in downplaying disaster. The bureau in question carefully crafts the results announcement, and the media picks up on it, spinning the bad news as good news. It seems to happen every time, such as with the terrible jobs report last week that somehow got rendered as a wonderful jobs creation. The reality is far grimmer.

And so this habit continues with today’s release of the Consumer Price Index, which I had expected to be flat to falling month-over-month. I was preparing to explain that this wasn’t necessarily good news. Instead, what we got was another month-over-month increase of 0.4 percent, which is the same as last month and a far cry from July, when the release led the preposterous Biden administration to claim that there was “zero” inflation.

Sure enough, the headline word this morning is that inflation has slowed. Trust your instincts here: Do you feel the slowing of inflation? Most people think that a slowing might mean, for example, that things are just a bit cheaper than before. That’s not what the word means. In this context, slowing means that the 12-month increase is 7.7 percent, which is a declined pace of increase compared to every month this year.

Source: U.S. Bureau of Labor Statistics

In normal times, a 7.7 percent inflation would be a shock. But in these terrible times, when so much about our once-stable lives has been upended, we’re supposed to believe that this is progress from 8.3 percent. Analogy: Every month this year, five houses on your city block have been robbed. This month, only four have been robbed. You should be happy!

In other words, this isn’t progress. It’s more of the same. It only superficially appears to be slowing because the 12-month number benefits from low month-over-month increases in some big areas over the summer months.

Source: U.S. Bureau of Labor Statistics

Right now, we’re suffering from rising food and energy costs mainly, in the midst of other problems, such as a frozen housing market and massive layoffs among white-collar tech workers.

All told, we’re still at a 40-year high, so anyone telling you that you should just relax and be confident that things are getting better is truly selling you a very expensive bill of goods.

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

Or here’s another way to look at this. The dollar of 1980 is now worth, in terms of goods and services, only $0.26 cents. Might as well say a quarter. The pace of pillaging rapidly increased in the past two years.

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

Tracing the psychology of this inflationary bout that’s nowhere ended has been a revealing exercise. At first, it seemed just like another example of the chaos of our times: prices up, prices down, shortages here and there, and dislocations and breakages everywhere. Surely this was just a passing stage. The Biden administration seized on the confusion and the public hope that it would all go away.

The word they used was transitory. Think about that term. It literally means a transition. But from what to what? They never said. Everything is a transition from something to something else. The term is meaningless. As a propaganda tool, however, it worked as a palliative because it sounds sort of like temporary. So when people heard that, they said, “Whew, things will soon go back to normal!”

Here’s the bad news: There will be no going back to 2019 prices. Just forget about it. The Fed will never allow that because that would be tolerating a deflation of about 14 percent. I would welcome that and so would you, but the geeks at the Fed are convinced that such a dramatic price movement downward would provoke a massive depression, which they want to avoid at all costs. So they'll forever tolerate ongoing devaluation of the currency rather than risk a full-scale meltdown.

The real takeaway from today’s CPI report is that the inflation is embedded. What does that mean? It means that it has become structurally inevitable at three levels.

First, we see wages rising as providing means for workers to accommodate higher prices, which in turn allows more room for businesses to pass on higher costs. Second, we see businesses in dire need of foisting higher costs to buyers at all levels because their margins have been so seriously hurt. Third, we have consumers developing expectations of higher prices in the future, so they prefer to buy now rather than later. These inflationary expectations feed more inflation by increasing the velocity of money.

These three factors—sometimes called wage push and cost pull plus inflationary expectations—create a machinery that operates like a perpetual motion machine that no one can stop. Certainly, there’s nothing the Fed can do about it now. It can raise federal funds rates higher and higher and must do so until they get to the terminal rate at which they’re higher than the inflation rate. That policy is what’s killing real estate and the bond market now.

It doesn’t fix inflation. At some point, and businesses never know precisely where that point is, consumers balk at ever higher prices and turn to thrift stores or just doing without. That’s when the bankruptcies and job losses set in. That’s what’s happening in tech right now: dramatic labor cost cuts to survive as a company. They’re hoping it works.

In the end, inflation works very much like a widespread and highly transmissible virus. There’s nothing that lockdowns can do to stop it. Price controls and forbidding add-on fees (such as those that Biden wants to do) only delay the inevitable. In the end, the $6.3 trillion in new money created since 2020 has to become endemic. The “immune system” of prices has to come to reflect the new reality regardless.

Inflation now is seriously embedded. The damage is done and the effects are ongoing. This is true regardless of which party is in control. The only thing policymakers can do right now—which they aren’t doing—is create conditions for higher economic growth in the future through dramatic cuts in regulation, spending, and taxes.

Please don’t forget what few are admitting: All of this began with lockdowns. That was the trigger. But for that, it’s very likely life would be clicking along normally right now and your life and freedoms would be more-or-less intact, even with Biden’s dangerous policy agenda.

And herein lies the tragedy of the supposed red wave that didn’t happen. It takes away most if not all the energy from big change that could set us on a future path of recovery.

For now, and especially in light of the depressing election results, we have stagflation as far as the eye can see. The only thing really “slowing” is hope for the future.