Thank you Eyegore for allowing me to paraphrase one of your best lines in “Young Frankenstein”.
The Fed may not say it, but I am sure they are thinking it, Where is the inflation we should be experiencing right about now?
The Fed has always had an inflation rate that they felt was healthy and non-restrictive on growth. I believe the level is in the 2-2 1/2% range. We have operated throughout the last five or six years below that target and the Fed has focused more on its other mandate, unemployment. Prior to the pandemic taking hold in early March of last year, we were right at the sweet spot for the Fed. 3.50 % unemployment and inflation was a touch below what they felt was optimal.
However, now we are seeing commodity prices gain, we are seeing food stock prices gain, we are seeing energy prices gain and yet the reported CPI is around 1.8%. What gives?
I really don’t know, because if you look at the bigger picture and the bottom line you would see that the prices you are paying almost everywhere are up substantially more than 1.8%.
Dig a little deeper and it still makes no sense. Food prices increased .02% in February. Huh? Not sure but everything that I purchased in the super market in February was more that it was in February of last year and they say food, year over year, is only up 3.6% from last year. I don’t think so. Their methodology is curious.
Another example of curiosity is energy. In the CPI, energy sector only rose 2.4% year over year. I will challenge that as long as I am around. You look at the increase as reported by the Bureau of Labor Statistics and there is no way in Hell energy just went up 2.4% from February of last year. Let’s see, what Monty Pythonian type of accounting will they use when the March CPI numbers come out. Gasoline in March of last year averaged $1.99 a gallon across the country. This past March I believe it was in the neighborhood of $2.79. Using my public school math, it looks like that is a roughly 40% increase. Actually, I think it might even be more. The point is, I think we are experiencing inflation and inflation that is a lot more significant than the numbers suggest.
One analyst I heard on one of the networks was convinced that the reason we weren’t seeing substantial inflationary pressure was because companies were absorbing some increased commodity costs and not passing them on to consumers. I don’t know about that. It seems that companies are doing just fine passing along their increased supply costs to consumers.
Another dumb theory is that prices really haven’t risen because manufacturers have been selling you less while keeping the prices the same. It’s a painless inflation of goods. I agree to a point about this. Campbells soup cans have been getting smaller for years. Coca Cola in some markets sells 11.5 ounce cans of Coke for the same price as their 12 ounce cans from a year ago. This is not new by the way. What I am saying is that prices are rising. I do not care if it’s a smaller can of soup or soda, prices are going up and they are going up a lot faster than the government reports say.
Going back into my college years, one thing that I remember about economics is that the theory was that the biggest cause of inflation is wage hikes. When wages grow, companies increase prices to fill the gap and maintain a reasonable cushion of profitability. Wages aren’t growing enough just yet to impact prices. The labor sector still has more to absorb. When that gets tightened though, there will be a much more profound inflationary spike.
I am in the corner where I believe inflation isn’t the worst thing in the world if it is caused by an economy that is expanding substantially. Everyone wins, everyone makes money and the standard of living increases across all income levels. The fear should be that if we see an inflationary spiral the likes of which we haven’t seen since the ‘70’s and the Fed does not act, it could get out of control. That will be highly unlikely. The Fed may have run out of tools to stimulate the economy, but they certainly have plenty of tools to cool off an overheated economy.
Thanks Peter for stating the obvious. You've put numbers to what we is happening and I think you quote was spot on!