Inflation is not a risk to the economy: it is happening to the economy right now.
Friday, we learned that consumer prices made their biggest jump since John Lennon was alive. This has resulted in the biggest Social Security COLA increase (Cost Of Living Adjustment) since the Original Bush Administration. As if that is not bad enough, wages are “lagging.” In fact, in inflation adjusted dollars, wages fell. Things get even worse if you have the math at your disposal to factor in the cost of housing — and we all need a place to sleep as much as we need food and fuel. It turns out that they took housing out of the CPI in 1983, and if you add it back in the inflation rate is more like 5.3%. I don’t think CPI includes rising college costs either.
Now, some pollyannas point out that this is the CPI (Consumer Price Index), which is relatively volatile, and was pushed up by food and energy prices, the core rate wasn’t nearly that high, and besides which fuel prices are a one-time blip so everything will be back to normal soon please Mr. Greenspan don’t kick our butts and stifle the economy with rate increases. This view completely discounts the fact that an increasing amount of the household budget has been going towards fuel lately. Various state Governors have been rethinking their travel arrangements because of fuel prices; they are cutting travel and switching to higher efficiency vehicles where possible. Maybe you don’t think much about the effect of gas prices on Joe and Jane Average when you are working on Wall Street; after all those folks probably took the subway.
This view was further crushed by today’s economic news: the PPI (Producer Price Index) has shown its biggest leap since the Original Bush Administration. Energy prices alone had the biggest increase since Iraq invaded Kuwait. Gasoline increased 17.9%. Even the core rate — excluding food and energy that we arguably can’t live without — increased a “worrisome increase of 0.3%….” Since goods just can’t be produced and transported without energy, expect the energy price increase to have a lasting effect on the PPI and CPI in general. The L.A. Times helpfully adds: “Businesses have the option of passing along the higher wholesale prices to consumers or reducing their profits, two alternatives that can eventually undermine economic growth.”
So there you are. Prices go up, or profits go down. Or, of course, companies find ways to cut costs — probably involving laying people off. In any event we lose. What a perfect time to tighten bankruptcy rules.