“Inflation rate drops”, or “Inflation rate remains elevated,” choose your headline to describe a change in America’s inflation rate from 8.5 percent in March to 8.3 percent in April. This change in the number following the decimal point after an 8 is of no policy consequence. It can’t change the important fact that seven-in-ten Americans view inflation as “a very big problem for the country” says the Pew Research Center – and not other concern comes close.
It certainly does not portend victory for Federal Reserve Board monetary policy. For one thing, wholesale inflation shot up 11 percent in April for stuff heading for consumers. For another, core inflation, which excludes food and energy, is the indicator policymakers look to as a harbinger, and it rose. More important, as the Lindsey Group points out, the annualized three-month rate of retail inflation is higher than the six-month average rate, which in turn is higher than the twelve-month rate. That arithmetic arrow is pointing upward.
The Silent Thief Robs From The Poor
Inflation is a silent thief. The increased purchasing power that workers would have received from wage increases has been stolen by an inflation rate three full percentage point higher than their wage gain. But inflation is not an equal opportunity marauder. It has what economists call distributional consequences.
Teenage kids who want to work never had it so good: the unemployment rate among 16-19 year old workers is close to its 68-year old low. Home owners have watched the value of their houses rise by over 30 percent in the past year, while interest rates on their 30-year mortgages remain fixed. High earners are finding the average 7.2 percent jump in the cost of “food away from home” tolerable and are scrambling for reservations at their favorite swank restaurants.
Not all workers are perfect matches for the 11.5 million unfilled job openings, two for every job seeker, but alternatives are so numerous that some businesses are reporting that 60-70 percent of candidates don’t show up for scheduled interviews, and others that 15-20 percent do not show up on the first day of jobs they have accepted.
But, on the economist’s inevitable other hand, the one that made Harry Truman wish for a one-handed economist, pensioners on fixed incomes scrimp on meals and medications and face a cold winter with thermostats turned down or set to “off”. Renters with expiring leases face sizeable increases. Many families are unable to reach the first step on the home-ownership ladder. Homemakers scramble to fill their shopping carts without doing serious damage to family budgets, and often must trade down in quality in order to do so.
Prisoners of policies developed in response to the pandemic who have not yet ventured into the wider world are re-examining their summer options. Airline fares shot up in April by close to 20 percent, bringing the rise since last year to 33 percent. According to Hopper Price tracker, the average “good deal round-trip domestic airfare” this month cost $404, up from $272 or almost 50 percent, since last May. If released shut-ins can afford gasoline that has risen more than 80 percent since before the pandemic, they might drive to some salubrious resort, or brave a visit to relatives, but many tell pollsters they can afford to plan only short trips.
A Tale of Three Joes
Joe Sixpack and Joe the Plumber, unlike Joe the President, confront the higher gasoline price when they fill up the tanks of the vehicles in which they schlep their tools from job to job, eschewing the public transit so beloved of liberal planners. They must pay up or lose work. Meanwhile, Joe the President cancels sales of offshore oil leases that could produce oil to lower crude prices that underpin gasoline prices.
It is never good to be poor, but poverty is even less bearable when food, already claiming a large portion of the family budget, costs 9.4 percent more than it did last year, the largest annual increase since early 1981. And budgeting becomes a nightmare in the face of monthly price increases of 2.5 percent for milk and 10.3 percent for eggs, with more to come. America’s largest food processor, Tyson, in April increased its prices of beef, chicken and pork by 23.8, 14.4 and 10.8 percent, respectively.
Inflation also distorts investment incentives. Rising prices of Apple products, which are not on most consumers’ list of essentials, are likely to constrain demand for iPhones and other such products, while soaring price of gasoline pours billions into oil producers’ pockets. Investors respond this year by selling off Apple shares, down 20 percent, and bidding up those of Exxon by 40 percent, and making Saudi Aramco the world’s most valuable company.
Inflation A Friend Of The Tax Collector
Inflation is also a wonderful tax collector. As nominal wages – not corrected for inflation – rise, so do taxes levied on those wages, sending cash to the Treasury without the need for an annoying tax increase. Politicians setting tax rules know that inflation wipes out the raises and then some, and even raises the tax rate when inflation pushes the worker into a higher bracket. Silence is golden when it comes to taking responsibility for a tax increase.
So far, the inflation genie has avoided being corked up in the bottle Fed chairman Jay Powell has in mind for it. And seems likely to remain on the loose if Powell persists in leaving three-quarter percentage point increases off the table at the committee’s June and July policy meetings. Some experts believe the Fed will be forced to raise its benchmark rate to 4 per cent over the next year, rather than 3 per cent as the Bank’s policymakers now plan.
The Fed And “Rich Strike”
The Fed just might succeed in its belated effort to catch up with reality if Putin’s war, or China’s lockdown of the world’s workshop, or supply bottlenecks prove transient. Or if interest rate increases already mooted “destroy” sufficient consumer demand, easing pressure on prices. With Rich Strike, an 80-1 longshot, winning the Kentucky Derby, anything, including an accurate growth forecast by the Fed, seems possible.