The Upward Downward Spiral

The Labor Department reported earlier this week that the Consumer Price Index–which attempts to quantify prices of a broad swaths of goods and services in the American economy–increased 0.9 percent in October, resulting a 6.2 percent increase in the CPI since last year. That’s the highest annual increase in the CPI in more than 30 years, since December 1990. And the CPI increase measured in some metropolitan areas was even worse: the Atlanta Journal-Constitution reported, for example, that the CPI increase in that area was 7.9 percent, the highest increase in any city in the country.

It’s pretty clear that inflation is back as an area of significant economic concern. Just hearing that word sends a shudder of dread through those of us who lived through the high inflation period of the ’70s and early ’80s and the belt-tightening days when the Federal Reserve took draconian steps to halt the inflationary spiral and wring the constant price increases out of the economy.

The big question right now is just how persistent the inflationary spiral will be. The Federal Reserve says we’re in the midst of “transitory” price increases, but the most recent CPI data has increased market skepticism of that rosy outlook. The data showed price increases pretty much across the board, and not limited to more volatile areas that can react to temporary shortages, like fuel and food. Even if food and fuel prices are stripped out of the analysis, leaving only “core CPI” to be considered, prices are rising at a 4.6 percent annual clip, which is the highest “core CPI” rate since August 1991.

Even worse, the Labor Department reported that the CPI surge meant that real wages, after inflation, fell 0.5 percent from September to October. That’s a familiar scenario for those of us who lived through the country’s last big inflationary period, in which wage hikes and salary increases never quite seemed to catch up with the CPI. In those days, the upward spiral in prices put many people into a downward spiral in terms of their personal finances and debt situation and really hurt seniors and others living on fixed incomes.

Perhaps the Fed and Treasury officials who reassuringly contend that the inflation spike is temporary will turn out to be right–but what we’ve been reading about “supply chain” seems calculated to feed into more price increases, not less, and shortages that the law of supply and demand dictates will produce higher price tags as we head into the holidays. We need to do something about inflationary pressures and fix the supply chain problems before we find ourselves trapped in another upward-downward spiral.

The Inflation Watch

The U.S. got some economic news yesterday that is designed to unsettle those of us with more than a few years under our belts. The Consumer Price Index rose 5.4 percent in June, year over year, which was higher than analyst expectations. It’s the highest year over year increase since 2008. And while economists expected some inflation—it’s hard to avoid when stimulus checks are being sent to millions and government spending has exploded—the magnitude of the increase shown by the June data was greater than the forecasts.

Inflation data can be broken down in many ways, because of course prices for all goods and services don’t rise at uniform rates. Some observers noted that the “core” inflation rate, which strips out more volatile food and energy costs, was 4.5 percent—the highest increase since November 1991. Others argue that the rates are being driven by increases in some sectors, like in the cost of used cars, that seem to be reflecting a short-term imbalance of supply and demand that will work itself out. And still others note that the energy sector, and the skyrocketing cost of fuel, will have a ripple effect that can be expected to drive further increases in other areas, like food and many consumer goods, where transportation costs are factored in to prices. Nobody quite knows what might be coming next month, or later this year.

If, like me, you lived through the ‘70s, news about growing inflation is like fingernails on a chalkboard. An inflationary cycle means your paychecks buy less, because pay increases never quite catch up to prices, and it means the money that you’ve carefully saved and invested is worth less—a result that punishes prudent and responsible behavior. Retirees and people on fixed incomes get crushed and find that their nest egg has become a lot smaller than they thought.

And we veterans of the ‘70s and early ‘80s also remember that the cure for inflation—high interest rates and tight monetary policy that consciously stifles economic growth and produces high unemployment rates—is no treat, either.

Economists will be watching to see if this price spike is transitory, or is the first sign that we are on the road to a bad long-term inflationary period. I’ll be watching, too, and hoping that our economy isn’t cycling back to the ‘70s mode.