What to do about Inflation

Americans are not lacking for things to worry about: mass shootings, extreme weather, insurrectionists, and, of course, inflation.  On June 10th,  the Bureau of Labor Statistics announced (https://www.bls.gov/news.release/cpi.nr0.htm ) that the consumer price index had increased 8.6 percent in twelve months, the largest yearly increase since December 1981.  Americans are very upset by the rising costs.  The Washington Post (https://www.washingtonpost.com/politics/2022/06/07/pessimism-about-economy-is-about-both-partisanship-prices/) noted: “Polling from YouGov conducted for The Economist found last month that 58 percent of Americans think the economy is getting worse.”

There is some positive economic news: unemployment is low (3.6 percent) and real hourly wages have increased (5.2 percent).  The economy is growing (3.5 percent annually) — although it dipped slightly in the first quarter of 2022.  Nonetheless, concerns about inflation dominate the mainstream media.

1.The biggest contributor to inflation is the increase in energy costs — 34.7 percent in twelve months (with gasoline up 48.7 percent).  On June 10th, the average US cost of a gallon of gasoline reached $5 — a year previous the average cost per gallon was $3.08.  Analyzing this increase, the New York Times (https://www.nytimes.com/2022/06/11/business/energy-environment/gasoline-price.html) stated: “The war in Ukraine has had the most direct effect on gas prices, as sanctions on Russia have pulled more than a million barrels of oil off global markets. Energy traders have also bid up oil prices in anticipation that Russian production and exports will fall further…. [However] There isn’t enough capacity to refine oil into gasoline, diesel and jet fuel. Oil companies closed a handful of refineries in recent years, especially during the pandemic when demand plummeted.”  That is, the biggest factor has been the war in Ukraine, but another contributor has been the delay in increase in domestic production.  CNET (https://www.cnet.com/personal-finance/heres-why-gas-prices-are-so-high-and-why-they-wont-be-going-down-anytime-soon/ ) commented: “Demand for gas plummeted during the pandemic, causing oil producers to put the brakes on production. Even though demand is nearing pre-pandemic levels, producers are still gun-shy about increasing production. In April, OPEC fell short of its targeted production increase by 2.7 million barrels a day.”

A recent Washington-Post poll (https://www.documentcloud.org/documents/22056399-2022-05-12-post-schar-school-trend-for-release ) indicated that Americans blame high gas prices on “corporations trying to increase profits” (72 percent),  “Russia’s actions against Ukraine” (69 percent), “disruptions from the coronavirus pandemic” (58 percent), and President Biden (58 percent).

Two factors are interacting: Russian oil is now unavailable on the open market and the other major producers are under capacity.  (Some say that the big domestic oil producers are happy with the high prices and place greed above the national interest.) President Biden has indicated that he is willing to use emergency powers granted under the “Defense Production Act” to boost production and to keep domestic suppliers from exporting oil. (https://www.bloomberg.com/news/articles/2022-06-15/biden-willing-to-use-emergency-war-time-law-to-boost-gasoline) That would be a good move.

2.The next largest contributor to inflation is food costs — up 10.1 percent in twelve months.  Many of the same factors that affect gas prices also impact the cost of food.  For example, the war in Ukraine has Increased the price of food throughout the western world.  The increased cost of gasoline has drive up food costs because food needs to be transported from farm to market.  In Asia, a resurgence of the pandemic has disrupted supply chains.  There are also food staples that have been impacted by extreme weather; for example the price of beef has been affected by increased costs of feed and water.

If the US government brings down the price of oil, this will lower the cost of food because transportation costs will go down. The Biden Administration might also consider relief for farmers that are severely impacted by climate change.

3.The Bureau of Labor Statistics tells us that “all items other than energy and food” have increased 6 percent in the last twelve months.  this includes items such as “new cars,” “shelter,” “apparel,” and “medical care services.”  All these items are going up, but some more than others; for example, “new cars” are up 12.6 percent because of supply-chain issues.

On June 15th, the Federal Reserve raised interest rates .75 percent. (https://www.nytimes.com/2022/06/15/business/economy/fed-interest-rates.html ) Not all economist agreed on this step.

The interest rate increase won’t impact the cost of energy and food — they will require the interventions noted above.   The Federal Reserve interest rate increase will impact housing purchases (and renovations) and the purchase of new cars (and other large consumer expenditures like TVs and boats.)  The trick will be to “cool off” these purchases and not tank the economy.  The Federal Reserve intent is to inspire a “soft landing” and not a recession.

4. The BB perspective: the US economy is in good shape compared to the rest of the world and we’re likely to go into a period of modest growth compared to our trading partners, who will be in recession.  (For example, Great Britain and Germany are probably headed for a recession.)

5.PoliticsIn today’s polarized environment, Democrats and Republicans view inflation differently. (https://www.washingtonpost.com/politics/2022/06/07/pessimism-about-economy-is-about-both-partisanship-prices/)

Most Republican voters don’t understand economics, so it’s easy for them to believe that President Biden caused inflation.  Recently Florida Republican Senator Marco Rubio  said: “This will be a [period] of high gas prices, shortages and inflation because far left lunatics control our government.”

BB perspective: President Biden should get very aggressive with big-oil companies, and Russia.  He should blame energy costs on them and subject them to harsh penalties.

Biden should blame food costs on big-oil (transportation) and climate change.

In general, Biden needs to be more outspoken about inflation. And, of course, more aggressive attacking the root causes.