Is Inflation Here to Stay?

Many people with good reason worry that inflation may be here to stay, as if we have moved into a new economy that is untethered from the behavioral norms, history, and rules of previous decades. There are many contributing factors to consider.

For years, Americans have not paid the true cost of the goods and services they consume, allowing inflation to appear nonexistent. Those costs were often hidden, externalized, or subsidized by frothy stock valuations, venture capitalists, or the exploitation of people and natural resources around the world.

Much of the labor force in the US has been underpaid for decades, forcing many employees to live in poverty while working full time or rely on government programs and safety nets paid for by taxpayers. The worst or most dangerous jobs to endure were often paid the least, when they should have been paid the most. Those days may be coming to an end as workers demand better pay, especially for the least attractive jobs that the economy still needs performed.

The true cost of energy, especially that of fossil fuels, was first subsidized by governments in many ways, then externalized to others as the damages from climate change were socialized to future generations. Transforming and decarbonizing the global economy will take trillions of dollars of investment, which will likely raise the cost of nearly everything we can touch or experience.

Americans have no idea of how much is about to change due to climate change and decarbonization. A planet undergoing the effects of climate change will experience agricultural disruptions, disasters, conflicts, scarcity, and human migration at levels present generations have never witnessed or even imagined would occur in their lifetime. Crises in financial markets, such as global reinsurance, will make many things unaffordable to the middle class. Global economists warn the costs will be staggering as much of the world becomes inhospitable to living and commerce.

The rest of the world has subsidized the US economy by buying our debt, manufacturing our products, and mining the natural resources we need, all at unsustainable prices.  Globalization and offshoring allowed Americans to consume more and more goods on the backs of hard-working laborers in developing economies. But deglobalization due to conflicts, security risks, supply chain fragility and one crisis or disaster after another is causing production to be re-shored back to the US with higher costs.

In an over-hyped tech boom, investors and venture capitalists loaded up their portfolio companies with so much cash and inflated valuations that it allowed them to sell products and services way below their true cost. And they often did so by conning millions of workers into the gig eCONomy. Ridesharing and grocery deliveries are two examples.

Some economists predict the world is entering into a new era of scarcity after so many years of overabundance with an obscene number of choices for almost any food item or consumer product. This too will increase prices. The era of plentiful options and overconsumption may be drawing to a close as humans move to a more sustainable economy.

Consumer price inflation is roaring because companies can charge more and get away with it with little risk. Consumer products companies, restaurants, and oil giants are reporting double digit growth in profits. Decades of mergers, acquisitions, and consolidation across so many industries have allowed conglomerates to charge what they like with few competitors to worry about as consumers have fewer and fewer choices.

Finally, to keep the economy humming along, the government has continued to borrow while the Federal Reserve poured trillions of dollars into markets which had the affect or creating an artificial, bloated, economy. We have basically taken trillions from the future and dumped them into the present economy; also unsustainable as it is based on the myth that perpetual growth will pay for it all. This does not work when the cost of growth ends up being more than the benefits from it as I recently wrote about. The result is an endless surplus of dollars chasing a finite supply of goods, services, and especially assets such as real estate.

To keep the nation at near full employment, and to keep people off the streets protesting, it is unlikely central banks around the world will ever close the spigot of cheap money which the world has become so addicted to and contributes to inflationary pressures. While the Fed is frantically trying to shock inflation out of the US economy with nonstop increases in interest rates, they seem oblivious that our economy is no longer a closed system of which they are masters in controlling. So much of what happens here is now determined by global movements of products, energy, labor, and money where the US is simply no longer a god-like force that can command it.

So yes, inflation may very well be here to stay as a structural part of a new economy. But that said, could it go away as quickly as it arose? Certainly! One reason it may disappear is because of magic tricks by federal agencies like the BLS which track it. They could simply change how inflation is measured, once again, and poof, it will disappear.

As example, one of the tricks already used is that when the price of something goes up, say beef, they argue that consumers will simply substitute a cheaper protein, like chicken, which costs less. So actually, prices went down, not up! Yes, they actually do this in what is called the chain-weighted CPI. So we should stay tuned for more changes of how structural inflation will be measured and rationalized in the new economy we have passed into.