Inflationary Psychology and GQP Fear Mongering Over Inflation

Neil Irwin recently wrote at the New York Times, Americans Are Flush With Cash and Jobs. They Also Think the Economy Is Awful.

Americans are, by many measures, in a better financial position than they have been in many years. They also believe the economy is in terrible shape.

This is the great contradiction that underlies President Biden’s poor approval ratings, recent Republican victories in state elections and the touch-and-go negotiations over the Biden legislative agenda. It presents a fundamental challenge for economic policy, which has succeeded at lifting the wealth, incomes and job prospects of millions of people — but has not made Americans, in their own self-perception, feel any better off.

Workers have seized the upper hand in the labor market, attaining the largest raises in decades and quitting their jobs at record rates. The unemployment rate is 4.6 percent and has been falling rapidly. Cumulatively, Americans are sitting on piles of cash; they have accumulated $2.3 trillion more in savings in the last 19 months than would have been expected in the prepandemic path. The median household’s checking account balance was 50 percent higher in July of this year than in 2019, according to the JPMorgan Chase Institute.

Yet workers’ assessment of the economy is scathing.

Yet another example of “what have you done for me lately?” ingratitude.

The reasons seem to be tied to the psychology of inflation and the ways people assess their economic well-being — as well as the uneven effects that rising prices and shortages have on different families. It may well be shaped by the psychological scars of the pandemic, one manifestation of this being an era of exhaustion.

Note: What Is Inflationary Psychology? Inflationary psychology is a state of mind that leads consumers to spend more quickly than they otherwise would in the belief that prices are rising. Most consumers will spend their money on a product immediately if they think its price is going to increase shortly. Buyer panic thus creates self-fulfilling inflation by putting demand pressures on supply.

Regardless of the exact causes, after decades in which the availability of jobs (or lack thereof) drove economic sentiment, inflation now appears to have become the more powerful force.

There is no doubt that prices are rising rapidly — the Consumer Price Index is up 5.4 percent over the past year, and there are shortages and other inconveniences that do not show up in inflation data but reflect the same underlying phenomenon.

But that follows years of relatively low inflation; the index has averaged only 2.8 percent a year over the last three years. And higher prices have arrived at the same time — probably not coincidentally — as a surge of federal spending has inflated Americans’ bank accounts. This includes stimulus payments of $2,000 per person earlier in the year and a child tax credit worth up to $300 a month per child since the summer.

Americans seem to be relatively optimistic when asked more narrowly about the outlook for their incomes, or for the job market.

“They’re telling us, looking ahead they expect business conditions to get better, they expect more jobs, and they expect incomes to rise,” said Lynn Franco, senior director of economic indicators at the Conference Board, a business research group.

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Rising costs for staple goods tend to influence people’s perceptions of inflation. Gasoline prices, for example, are visible on big signs on every street corner, and have risen 74 percent from their pandemic lows of May 2020.

But they are below their levels for most of 2011 to 2014, and average earnings have risen sharply since that period. To look at it one way, in October it took about six minutes of work at the average private sector wage to earn enough to buy one gallon of regular unleaded gasoline. In October 2013, it took almost nine minutes of work.

To get a better idea of why elevated inflation can contribute to such negative assessments of the economy, it helps to go beyond the details of wage and price trends in 2021 and turn to a piece of economic research from the 1990s, conducted by Robert J. Shiller, the Yale economist.

He led surveys to try to ascertain why inflation, even at moderate levels, frustrated ordinary citizens so much more than economic theory implied it should. He found that people did not believe they would receive adequate pay raises to keep up with rising prices. He also found that people believed it would hinder overall economic growth; that it would be harmful to national morale; and that it could fuel political chaos or damage national prestige.

“In answering questions about what is really important and what our national leaders really ought to pay attention to, people may tend to rely on some deep intuition derived from life’s experiences,” Professor Shiller wrote in 1997. The idea of inflation, he continued, evokes “arbitrary injustice, arbitrary redistributions and social bitterness,” and “memories of social situations in which morale and a sense of cooperation were lost.”

That may be what makes the inflation surge such a tricky policy problem: It can be about something more profound than dollars in people’s pockets and the price of a gallon of gas.

It is fear that Republicans and their propaganda machine play upon, and gets amplified in the corporate mainstream media. See the Washington Post today feeding inflationary psychology panic. Biden approval hits new low as economic discontent rises, Post-ABC poll finds:

The Post-ABC poll also showcases Americans’ current pessimism: Despite a mix of economic signals — falling unemployment and rising prices — 70 percent rate the economy negatively, including 38 percent who say it is in “poor” condition. About half of Americans overall and political independents blame Biden for fast-rising inflation, and more than 6 in 10 Americans say he has not accomplished much after 10 months in office, including 71 percent of independents.

And Bloomberg adds, U.S. Consumer Sentiment Drops to 10-Year Low on Inflation Fears:

U.S. consumer sentiment unexpectedly collapsed in early November as Americans grew increasingly concerned about rising prices and the inflationary impact on their finances.

The University of Michigan’s preliminary sentiment index decreased to 66.8 from 71.7 in October, data released Friday showed. The November figure trailed all projections in a Bloomberg survey of economists which called for an increase to 72.5.

Waning confidence reflects “ an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation,” Richard Curtin, director of the survey, said in a statement.

No one has ever accused Americans of being rational. And the vast majority of Americans know nothing about economics.

I hear Republicans, who know absolutely nothing about economics, trying to assert that we are in an inflationary cycle like the 1970s, demonstrating not only their ignorance but partisan fear mongering in an attempt to feed inflationary psychology. This is a dangerous game because Republicans have no economic good sense to deal with the damage they are doing. These nihilists only care about control of political power by any means necessary, and if the economy and American democracy are casualties, so be it.

As I have explained several times by now, what the economy is going through right now, emerging from a global pandemic that shut down the global economy, is most comparable to the post-World War II economy when the world was transitioning from a war economy back to a consumer economy with the attendant shortages of consumer goods and demand driven inflation.

Economist Paul Krugman agrees. History Says Don’t Panic About Inflation:

Back in July the White House’s Council of Economic Advisers posted a thoughtful article to its blog titled, “Historical Parallels to Today’s Inflationary Episode.” The article looked at six surges in inflation since World War II and argued persuasively that current events don’t look anything like the 1970s. Instead, the closest parallel to 2021’s inflation is the first of these surges, the price spike from 1946 to 1948.

Wednesday’s consumer price report was ugly; inflation is running considerably hotter than many people, myself included, expected. But nothing about it contradicted C.E.A.’s analysis — on the contrary, the similarity to early postwar inflation looks stronger than ever. What we’re experiencing now is a lot more like 1947 than like 1979.

And here’s what you need to know about that 1946-48 inflation spike: It was a one-time event, not the start of a protracted wage-price spiral. And the biggest mistake policymakers made in response to that inflation surge was failing to appreciate its transitory nature: They were still fighting inflation even as inflation was ceasing to be a problem, and in so doing helped bring on the recession of 1948-49.

About Wednesday’s price report: It looked very much like the classic story of inflation resulting from an overheated economy, in which too much money is chasing too few goods. Earlier this year the rise in prices had a narrow base, being driven largely by food, energy, used cars and services like air travel that were rebounding from the pandemic. That’s less true now: It looks as if demand is outstripping supply across much of the economy.

One caveat to this story is that overall demand in the United States actually doesn’t look all that high; real gross domestic product, which is equal to real spending on U.S.-produced goods and services, is still about 2 percent below what we would have expected the economy’s capacity to be if the pandemic hadn’t happened. But demand has been skewed, with consumers buying fewer services but more goods than before, putting a strain on ports, trucking, warehouses and more. These supply-chain issues have been exacerbated by the global shortage of semiconductor chips, together with the Great Resignation — the reluctance of many workers to return to their old jobs. So we’re having an inflation spurt.

On the plus side, jobs have rarely been this plentiful for those who want them. And contrary to the cliché, current inflation isn’t falling most heavily on the poor: Wage increases have been especially rapid for the lowest-paid workers.

So what can 1946-48 teach us about inflation in 2021? Then as now there was a surge in consumer spending, as families rushed to buy the goods that had been unavailable in wartime. Then as now it took time for the economy to adjust to a big shift in demand — in the 1940s, the shift from military to civilian needs. Then as now the result was inflation, which in 1947 topped out at almost 20 percent. Nor was this inflation restricted to food and energy; wage growth in manufacturing, which was much more representative of the economy as a whole in 1947 than it is now, peaked at 22 percent.

But the inflation didn’t last. It didn’t end immediately: Prices kept rising rapidly for well over a year. Over the course of 1948, however, inflation plunged, and by 1949 it had turned into brief deflation.

What, then, does history teach us about the current inflation spike? One lesson is that brief episodes of overheating don’t necessarily lead to 1970s-type stagflation — 1946-48 didn’t cause long-term inflation, and neither did the other episodes that most resemble where we are now, World War I and the Korean War. And we really should have some patience: Given what happened in the 1940s, pronouncements that inflation can’t be transitory because it has persisted for a number of months are just silly.

Oh, and for what it’s worth, the bond market is, in effect, predicting a temporary bump in inflation, not a permanent rise. Yields on inflation-protected bonds maturing over the next couple of years are strongly negative, implying that investors expect rapid price rises in the near term. But longer-term market expectations of inflation have remained stable.

Another lesson, which is extremely relevant right now (hello, Senator Manchin), is that an inflation spurt is no reason to cancel long-term investment plans. The inflation surge of the 1940s was followed by an epic period of public investment in America’s future, which included the construction of the Interstate Highway System. That investment didn’t reignite inflation — if anything, by improving America’s logistics, it probably helped keep inflation down. The same can be said of the Biden administration’s spending proposals, which would do little to boost short-term demand and would help long-term supply.

So yes, that was an ugly inflation report, and we hope that future reports will look better. But people making knee-jerk comparisons with the 1970s and screaming about stagflation are looking at the wrong history. When you look at the right history, it tells you not to panic.

Listen to the professor, not to idiot Republicans and their propaganda machine fear mongering and trying to feed inflationary psychology.  As the old adage says, “this too shall pass.”