Why We Should Stop Freaking Out About Inflation
We are experiencing an inflation panic for the first time since decades. The latest numbers were 6.2%. This is the highest level since 1990. Due to the rising government spending and the increase in economic activity as the pandemic fades, many parts of the globe are plagued by high demand goods, which has created huge supply-chain bottlenecks with insufficient ships and ports capacity, leading to delays and increased prices.
It is unclear whether the $64,000 or $128,000 question is about a new, dangerous normal for the world after 18 months of COVID-19. No one knows, of course, what the future truly holds, even as that doesn’t stop many from proclaiming with certainty. Weighing the facts, however, we should remember that not much has happened structurally in the global economy system over the past 12 months. Our economic numbers were based on changes in the previous twelve months. This was especially true last year when much of the world was locked down. And finally, last year’s economic woes with the inflation scars in 20.The following is a list of thThe -century is not yet fully recovered.
Today’s sense-memory of inflation is connected to the rise of fascism and World War II in the 1930s and 1940s, and then the roiling disorders of the world in the 1970s. This is why any hint at inflation causes PTSD within the ranks of economists, central banks and policymakers as well millions of wage workers in the middle classes.
Biden Administration, Federal Reserve have insisted for many months that inflation is temporary and a sign of increased demand. Treasure Secretary Janet Yellen said recently, “I expect that next year, many of the supply bottlenecks that we’re experiencing now in opening up our economy will recede.” But in recent weeks, that conviction has come under intense fire.
A wave of warnings has been issued about the rising inflation. They warn that excessive demand, government spending and COVID-style easy money policies by central banks may have unintentionally reactivated the inflation beast. Larry Summers, former Treasury Secretary has made a lot of noises accusing the government and central banks around the world of being complacent about the rising inflation risk. An easy Google search will reveal dozens of media articles that highlight rising prices and consumer unease. There are also a number of economists who believe that by preventing COVID-19 becoming an economic disaster, the inflation threat has been unleashed that was previously considered to be largely defeated.
It is difficult to determine the line between an anomalous situation and the new norm. However, it is remarkable that those who once balked at the notion that inflation was a distant memory when no evidence existed between 2000 and 2020 now are ready to raise the alarm about inflation following a few months with high inflation readings in 2021. Economists and central banks considered that there had been little or no inflation in the last twenty years a problem. Even though there was no evidence of inflation, central banks were quick to point out that some form of inflation existed. The Fed and every major central bank has as their primary charter “price stability” which is banker-speak for keeping inflation in check. Inflation may have been nowhere evident for years, but that didn’t stop multiple institutions looking for it.
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When numbers started rising in the summer it was simple to forget about old worries and declare that the demon long-feared had returned. It doesn’t matter that inflation has been rising annually, despite the COVID-19 economic downturn of 2020. We calculate most economic numbers based on year-over-year change, so if a year ago was unusually muted, it doesn’t take much to make the numbers a year later look big. It’s like this: If New York City rents plummeted from $2000 to $1500 a year ago, and then in the last few months rose to $2000 again, statistics would show a $500 increase or 25% annually, but it actually was flat relative to pre-COVID-19 levels. The current inflation statistics, along with other numbers like GDO growth, measure the changes from one year ago. However, a year ago there was still partial lockdowns in place and fear about COVID.
It is more important to ask whether there has been a fundamental shift in globalization. China has effectively closed its borders to international travelers, and it is restricting citizens’ travel abroad. But goods and capital have continued to flow as before, and the recent surge in demand for physical goods is coming off a prolonged period where people everywhere were primarily buying things for home use—Pelotons and sweatpants and sourdough pans. A world with high efficiency has meant that there is very little spare capacity, which means that demand can explode in an environment where supply and demand are both perfect.
In a world that has seen leisure and travel slow down, so is the need for service workers. Amazon and Walmart, two of the largest employers in the world, have raised worker wages which fuels rising prices. Inflation can also be stimulated by central bank policy of easy money, where interest rates are hovering around zero in most countries.
However, some inflation does not necessarily mean runaway hyperinflation. This will cause financial instability and decrease the quality of life for wage-earners. Actually, in some cases rising wages are higher than rising cost. The most significant dollar increase ever recorded is the 21% federal government hike in Medicare premiums. Because it raised inflation concerns, that story made all the news. At the same time, however, the government announced that Social Security premium would increase 5.9%, which more than cover the Medicare increases and still leave a healthy extra amount in people’s pockets.
However, not all inflation is bad for your lifestyle. Wages rise, social security benefits increase, and modest increases in the interest rates can help you save money and have more disposable income. Inflation has been a constant trend for many years, due in large part to new technologies. The dominant trend in inflation and deflation is not changing. Prices for sofas, refrigerators, and gas have risen due to demand and not because of changes in manufacturing costs. When supply is adjusted to higher demand and when the post-COVID-19 surge in demand has subsided, then we’ll be back in the world that we were in before: one where technology drives costs down.
It may well be the case that long-awaited inflation shoes are actually dropping. You can’t disprove a future fear, and the memory of destructive inflation runs so deep that even a hint of it is sufficient to spook markets and nations. It is likely, however that current fears about inflation are more of the past and less of the future. The greater danger to our safety isn’t that prices will continue rising but rather that we are afraid of being sucked in. We’ve had enough fear over the past two years; let’s not succumb to another wave.