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.

When A Dollar Was Worth A Dollar

IMG_2219We stumbled across this fading barfront sign as we walked through New Orleans to the Bywater neighborhood.  Imagine!  Cold Dixie bottled beer for only 13 cents each — and highballs for only 35 cents a pop.  Of course, that was back when people actually drank a drink called a “highball.”

The beers that we drank in New Orleans this past weekend all cost more than $5 a bottle.

Argentina Follows The Familiar Downward Spiral

George Santayana famously observed: “Those who cannot remember the past are condemned to repeat it.” We’re seeing that wisdom play out, again, in Argentina.

Argentina is an economic basket case. Under the government of its leader, Cristina Fernández de Kirchner, Argentina has spent lavishly on social programs and nationalized some industries. Argentina doesn’t have access to global credit markets since it defaulted on its debt obligations in 2001 and 2002. So the government is spending its dwindling reserves and seeking to devalue its currency — and in the meantime the Argentine peso is plummeting in value against the dollar and inflation is raging. The peso lost 19 percent of its value in January alone and inflation is somewhere above 25 percent.

Rather than learning the obvious lesson and ending the policies that are preventing free markets from operating, Argentina has gone in the opposite direction. The government blames supermarkets and oil companies for the inflation, and it placed caps on the prices of certain common goods sold at stores. Not surprisingly, those stores promptly began reporting shortages of the price-controlled items, because manufacturers and other suppliers obviously aren’t going to be pumping out goods that they can’t sell at a profit. Why would any business ship its goods to be sold in a price-controlled hyperinflation zone when it could just as easily send those goods to be sold in countries with rational economic policies? In Argentina, however, the government responded by fining the retailers and blaming their executives for raising prices.

We’ve seen this story again and again, in Latin America, in the Soviet Union, and in every other country that has adopted economic policies that interfere with the law of supply and demand and hinder the operation of free markets. Argentina will eventually experience a crash, as inflation spirals out of control and shortages become even more acute. But will it actually learn and take to heart the lesson it should have learned before?

Wherefore Art Thou, Cheap Date?

Saturday afternoon Kish and I went to see a movie.  The tickets cost us $10 a pop.  $10 to see a movie?  We’ve apparently crossed one of those product cost thresholds; theaters must feel there is no longer meaningful price resistance to two-figure ticket prices.

We shelled out the $20, but I found myself wondering about high school and college kids looking for the proverbial cheap date.  Unless you go to a second-run $1 cinema (with the change in price thresholds, maybe now it’s a $5 cinema) going to the movies certainly doesn’t qualify.  Between $20 for tickets and the standard inflated candy, popcorn, and soda prices, going to the movies has become an expensive proposition.  In this time of high unemployment among young people, how many kids have $35 to blow on a few hours entertainment?

Bowling is a perennial cheap date option — but many bowling alleys have gone upscale, with video screens, elaborate sound systems, disco balls overhead, and strobe lights down the lanes, and the prices for a game have increased as a result.  And you’ve got to drive there, which means you’re burning some of that $4 a gallon gas.  During the fall you can go to home football games on your student ID and make do with reasonably priced food from the band booster concession stand, but what do you do the other 47 weekends of the year?

I’m guessing that kids these days spend a lot of time in their parents’ houses, watching videos and playing video games.  Having somebody over to your parents’ house seems more like awkward hanging out than a date; I always thought the appearance as a couple in public, where your friends could see you together, was an integral part of the true dating experience.  Staying at your parents and sponging their food doesn’t exactly seem calculated to produce much self-respect on the part of the would-be couple — and it’s got to be exhausting for parents who have to come up with lame excuses to go down to the basement every five minutes or so to make sure nothing untoward is going on down there.

Maybe modern would-be Romeos and Juliets are just resigned to making do with less, or maybe they just “go Dutch.”  Either way, it’s too bad.  There was fun and inner value in the cheap date; I always felt good when I took my girlfriend out and paid for her movie and popcorn out of my own pocket, from my earnings at whatever job I had at the time.  I always thought my girlfriend appreciated being treated, too.  It’s sad to think those positive feelings aren’t being experienced by today’s jobless, house-bound youth.

The Fifty-Buck Fill-Up

Don’t look now, but gas prices in Ohio are spiking.  The cost for a gallon of unleaded regular has increased by more than 60 cents a gallon over the last three months.  This morning, with the gas gauge firmly on E, I stopped at the neighborhood Duke station for a fill-up.  To my chagrin, it cost $50.24 to top off the tank — and I had experienced the dreaded fifty-buck fill-up.

Gas prices are notoriously volatile.  Nevertheless, experts expect the prices to continue to rise, and rapidly.  The fact that prices are going through the roof during the dead of winter, traditionally a slow time for driving, is not a good sign.  The predictions are for $4 a gallon prices by spring, and even higher prices by the summer driving season.

The last thing our battered economy needs right now is a gasoline price spike.  People don’t budget for it, and if you are a commuter, as many Americans are, it is a cost you can’t avoid.  The money that consumers use to pay for most costly gasoline will not be spent on other goods and services and therefore won’t be used to create new jobs.  And the rising fuel costs will necessarily result in higher costs for goods delivered by truck — a category that includes everything from food to electronics — which means we may see an inflationary ripple effect in prices for a broad range of products.  This is not good news for an economy still trying to recover from a recession, or for a worker who took a faraway job because he needed to do so to feed his family.