OP-ED: Understanding inflation
Welcome to the discouraging world of high inflation. The headlines scream, “Inflation hits 40-year high at 8.6%.” Food and fuel prices are the No. 1 concern of most Americans. Observers blame the Federal Reserve for misreading the economic tea leaves. Fox News gleefully attacks the Biden administration for causing an “economic catastrophe.” Even loyal Democrats are asking what is going on and how do we fix it?
I am not an economist and have little background in the aptly called “dismal science.” However, I have studied the subject enough to understand that most of the accusations being hurled at policy makers and energy producers are at best superficial and at worst pure nonsense. This commentary will attempt to bring some common sense to our present inflation crisis.
The economy is complicated. Rarely is a single factor responsible for an economic outcome. All economists would agree that the overriding goal is to avoid an overheated economy/inflation on the one hand and recession/high unemployment on the other. Nevertheless, there are many competing theories on how to keep the economy in the Goldilocks zone of “not too hot – not too cold.”
Financial pundits are expert at using hindsight to assess an economic crisis. Politicians have used unpredictable, unforeseen economic calamities since the beginning of recorded history to unseat incumbents and gain power. Such was the case for the Roman Empire with grain, the French monarchy in 1789 with bread and now the Biden administration with oil.
There are four issues to consider in understanding our present high inflation. The first is “core inflation,” which excludes transitory or temporary price fluctuations. Volatile commodities such as food items and energy are excluded from core inflation. Annual core inflation rate in the U.S. slowed for a second month to 6% in May of 2022. It is the lowest reading in four months. Because of high food and gas prices, no one talks about core inflation, which is actually the more important long-term threat to a balanced economy.
There is evidence that core inflation will continue to moderate. Housing costs should come down as interest rates rise and lumber prices fall. New and used vehicles should become less expensive as the shortage of chips brought on by pandemic backlogs is reversed. Retailers like Target and Walmart have recently announced anti-inflation fire sales to reduce inventory surpluses in a variety of goods.
The second concern is gas/food prices, the focus of much of the boisterous political debate. The irony is that most economists agree, of all the price increases making up inflation, the two over which the Biden administration has least control are gas and food. Of course, these items are also the two items, which most concern angry voters heading into the midterm elections.
Larry Summers is an economist who has heavily criticized the Biden administration and the Federal Reserve for waiting too long to tackle inflation. However, when it comes to gas and food prices, he believes that these items have been influenced by geopolitical events, not domestic policy. On the Sunday talk shows, Summer announced his disbelief in Republican hypocrisy for supporting the Ukraine conflict while blaming Biden for high gas and food prices.
NATO-imposed sanctions against Russia have taken between 3.5 million and 4 million barrels of oil off the market, increasing the price of gas by $1.74 per gallon. A perfect storm was created with low supply at a time when world demand for oil increased following the pandemic. Regarding food shortages, there is gridlock due to a Russian blockade of Black Sea ports. Between 20 million and 25 million tons of wheat are stuck in Ukraine while global grain prices spiral upwards.
The third issue is “price gouging,” the go-to issue for Democrats as they seek to push back against consumer anger at high gas prices. A bill backed by House Democrats would give President Biden authority to declare an energy emergency. The bill directs the Federal Trade Commission to punish companies that engage in price gouging.
The bill has little chance of passing the Senate. It is pure political theater to place blame on the oil companies because they made record profits over the past six months. A detailed analysis by Barron’s (Why Is Gas So Expensive; June 10, 2022) shows that the profits of gas stations (now all franchised) are actually down this year. Struggling customers are buying less gas, coffee and snacks.
Refiners are the main reason that domestic supply of gas is low. Due to decreased demand before and during the pandemic, the refining industry contracted over the last decade shutting down 10 refineries. Now, supply is low, and demand/profits are high, as one would expect.
The last issue is recession. With the Federal Reserve reversing its quantitative easing policy and raising interest rates into a normal range, the economy should slow down for at least several quarters. My guess is that there will be a mild recession. The downturn should not be severe due to our low unemployment rate, high level of consumer saving and low level of consumer debt.
The takeaway from this commentary should be that economic cycles are largely beyond the control of lawmakers. It is better to evaluate the performance of elected officials on issues that they can control but often choose to ignore. These would include important topics like preserving our democracy, gun control, a women’s right to choose and voters’ rights.
Gary Stout is a Washington attorney.