Right-Wing Attempts To Gin Up An Inflation Panic Are Unwarranted

Republicans do not know jack diddly-squat about economics. For over 40 years they have pushed the disproved and discredited economic theory of faith based supply-side “trickle down” economics. It is an article of faith among Republicans, damn all the evidence to the contrary.

I have been seeing a lot of breathless news reports lately trying to create a panic over a rise in inflation as the economy comes out the coronavirus pandemic-induced recession of 2020.

Inflation has been minimal for years now, because of Federal Reserve policy.  The coronavirus pandemic caused production and consumption to collapse. A little “inflation” now is just clawing back some of that collapse. If something went down 15% last year, but is up 5% this year, is it really inflation?

Does anyone even know American history any longer? Post-war America after World War II is instructive to what we are seeing now. As the post-war economy shifted from military production to consumer goods long in short supply, there were shortages and supply chain disruptions. It is the law of supply and demand. There was inflation driven by these shortages and pent up consumer demand.

Republicans do not do economics, and lately they are even trying to erase American history. They are hoping that Americans are as ignorant and ill informed about economics as they are. (They would not be wrong to think this).

The Associated Press reports, Republicans point to inflation in bid to retake Congress:

Gas prices have whizzed past $3 per gallon in much of the nation. The cost of used cars and new furniture, airline tickets, department store blouses, ground beef and a Chipotle burrito are on the rise, too.

Many economists say the price increases are fueled by the aftereffects of a global pandemic and probably won’t last. But Republicans are hoping to storm into next year’s midterm elections arguing that steep government spending under President Joe Biden and a Democratic-controlled Congress has triggered inflation that will ultimately hurt everyday Americans.

The economic reality is more complicated. Still, with Republicans only needing to pick up a handful of seats to regain the House and Senate, the party increasingly sees the prospect of sustained higher prices as a way to connect policies made in Washington with the experiences of voters whose pocketbooks may be feeling the strain.

* * *

Consumer prices rose 5% over the previous 12 months, the largest one-year increase since 2008. Excluding more volatile items such as food and energy, prices were up 3.8% over the past year — the biggest 12-month jump since 1992.

Those leaps were driven by comparisons to the pandemic-hampered 2020 economy, but nonetheless show prices climbing sharply, with the cost of used cars rising 7.3% in May and food costs increasing nearly half a percentage point over the same period. Gas prices have risen from a nationwide average of $2.48 to $3.13 per gallon under Biden, the first time since 2014 that it has topped the $3 threshold.

Former Federal Reserve economist Claudia Sahm said this year’s inflation rates are likely to remain far higher than usual, but that’s chiefly due to the the pandemic pushing inflation uncommonly low last year. There’s also a boom in consumer spending due to pent-up demand as the virus recedes and the lingering effects of disruptions to global supply chain, she said.

“It is not a structural change in the economy, it is a few months,” Sahm said.

Others are playing down the risk of price gains being sustained, because many were caused by supply bottlenecks set to ease as the post-pandemic economic recovery takes hold.

“We’re still skeptical that this signals the start of a sustained pickup in inflation, either in the U.S. or elsewhere,” said Ben May director of global macro research for Oxford Economics.

Factories ramping up production are already easing some some pricing pressure. Lumber prices that skyrocketed recently are falling again. That eventually could affect everything from home-building in white-hot real estate markets around the country to the cost of a desk at Office Depot.

Nobel Prize winning economist Paul Krugman posted “The case for inflation panic” has “died,” in a Saturday morning Twitter thread. The Week reports Case for inflation panic has ‘died,’ Paul Krugman argues:

Krugman writes that the fears stemmed in part from a belief that the Federal Reserve’s “intellectual framework,” which includes making a distinction between “volatile commodity prices” and “inertial core inflation,” was wrong and the central bank was failing to consider that soaring lumber prices, for example, were “harbingers” rather than “transitory shocks.” But Krugman pointed to a swift decline in lumber prices since they peaked in May as evidence to dismiss that theory, and highlighted a recent analysis from the White House Council of Economic Advisers that makes a similar case.

Story #1 said that the Fed's intellectual framework — which makes a key distinction between volatile commodity prices and inertial "core" inflation — was all wrong, and that things like soaring lumber prices were harbingers, not transitory shocks 2/

— Paul Krugman (@paulkrugman) June 19, 2021

Excellent CEA post explaining why supply-chain problems look temporary 4/ https://t.co/JdFLTpf092

— Paul Krugman (@paulkrugman) June 19, 2021

Krugman also believes that people who have been worried about a major fiscal stimulus overheating the economy while a passive Federal Reserve ignores warning signs should breathe a sigh of relief, pointing to a recent Federal Open Market Committee statement that he views as a sign that the central bank is an “institution aware that inflation might become a risk and [is] willing to act if necessary.”

But last week's FOMC statement plus the "dot plot", while not extremely hawkish, suggested an institution aware that inflation might become a risk and willing to act if necessary 6/ https://t.co/oQzEpPDPJ8

— Paul Krugman (@paulkrugman) June 19, 2021

I never expected the supply-chain issues to be more than transitory, or the Fed to be irresponsible. But if you were worried about either possibility, this past week should have reassured you. Runaway inflation isn't coming 7/

— Paul Krugman (@paulkrugman) June 19, 2021

UPDATE: Here is Paul Krugman’s column in the New York Times based upon this Twitter thread. The Week Inflation Panic Died.

Today’s Americans are soft and selfish and do not know the meaning of sacrifice. They are not nearly as tough as “the Greatest Generation” that survived the Great Depression and won World War II. Now we have narcissistic selfish Americans who will not even wear a mask for their own safety let alone show concern for others, and will not get a vaccine shot to defeat COVID-19 because some idiots in right-wing media have made this a “culture war” issue about “owning the libs.” Thank God these pathetic losers were not around in World War II, or we would all be speaking German today.

During World War II, Americans went without to sacrifice for the war effort, and saw their purchases limited by government ration books. WORLD WAR II RATIONING ON THE U.S. HOMEFRONT:

During the Second World War, you couldn’t just walk into a shop and buy as much sugar or butter or meat as you wanted, nor could you fill up your car with gasoline whenever you liked. All these things were rationed, which meant you were only allowed to buy a small amount (even if you could afford more). The government introduced rationing because certain things were in short supply during the war, and rationing was the only way to make sure everyone got their fair share.

Almost overnight the economy shifted to war production. Consumer goods now took a back seat to military production as nationwide rationing began almost immediately.  In May of 1942, the U.S. Office of Price Administration (OPA) froze prices on practically all everyday goods, starting with sugar and coffee.

War ration books and tokens were issued to each American family, dictating how much gasoline, tires, sugar, meat, silk, shoes, nylon and other items any one person could buy.  View a listing of all rationed items.  Across the country 8000 rationing boards were created to administer these restrictions. A wartime edition of the American Woman’s Cook Book contained revised recipes and gave advice on dealing with food shortages.

Types of rationing included: Uniform coupon rationing (sugar is an example) provided equal shares of a single commodity to all consumers;  Point rationing provided equivalent shares of commodities by coupons issued for points which could be spent for any combination of items in the group (processed foods, meats, fats, cheese); Differential coupon rationing provided shares of a single product according to varying needs (gasoline, fuel oil); and Certificate rationing allowed individuals products only after an application demonstrated need (tires, cars, stoves, typewriters).

In the summer of 1945, as World War II drew to a close, the U.S. economy was poised on the edge of an uncertain future. The Post World War II Boom: How America Got Into Gear (excerpt):

Some economists even predicted a new crisis of mass unemployment and inflation, arguing that private businesses couldn’t possibly generate the massive amounts of capital necessary to run the pumped-up wartime factories during peacetime. A report released in mid-1945 by Senator James Mead of New York took this opinion, arguing that if the war in the Pacific ended quickly, “the United States would find itself largely unprepared to overcome unemployment on a large scale.”

But history proved the pessimists wrong. Most returning veterans had no trouble finding jobs, according to Herman. U.S. factories that had proven so essential to the war effort quickly mobilized for peacetime, rising to meet the needs of consumers who had been encouraged to save up their money in preparation for just such a post-war boom.

By the summer of 1945, Americans had been living under wartime rationing policies for more than three years, including limits on such common goods as rubber, sugar, gasoline, fuel oil, coffee, meat, butter, milk and soap. Meanwhile, the U.S. government’s Office of Price Administration (OPA) had encouraged the public to save up their money (ideally by buying war bonds) for a brighter future. In her book A Consumer’s Republic: The Politics of Mass Consumption in Postwar America, Lizabeth Cohen reported that by 1945, Americans were saving an average of 21 percent of their personal disposable income, compared to just 3 percent in the 1920s.

[D]riven by growing consumer demand, as well as the continuing expansion of the military-industrial complex as the Cold War ramped up, the United States reached new heights of prosperity in the years after World War II. Gross national product (GNP), which measured all goods and services produced, skyrocketed to $300 billion by 1950, compared to just $200 billion in 1940. By 1960, it had topped $500 billion, firmly establishing the United States as the richest and most powerful nation in the world.

The point is, stop listening to the fascist propagandists on Fox News and in conservative media, and stupid people, i.e., Republicans who do not know jack diddly-squat about economics. They have always been wrong. Always.

For an academic analysis, see Inflation in the aftermath of wars and pandemics (Introduction):

The economic consequences of Covid-19 are often compared to a war, prompting fears of rising inflation and high bond yields. However, historically, pandemics and wars have had diverging effects. This column uses data extending to the 1300s to compare inflation and government bond yield behaviour in the aftermath of the world’s 12 largest wars and pandemics. It shows that both inflation and bond yields typically rise in wartime but remain relatively stable during pandemics. Although every such event is unique, history suggests high inflation and bond yields are not a natural consequence of pandemics.

Excerpt:

Wars result in higher inflation and bond yields, pandemics do not

Figure 1 displays the median behaviour of inflation around major wars, together with its interquartile range (and also a median based only on global wars in our sample). Inflation has typically risen sharply both during and – especially – in the aftermath of major wars, with median inflation peaking at 8% one year after the war has ended.

Figure 1 Inflation has typically risen sharply both during and especially in the aftermath of major wars

Notes: CPI Inflation (% year-on-year) around wars, median and interquartile range.
Source: Goldman Sachs Global Investment Research, Bank of England (2021), Schmelzing (2020).

Figure 2 displays the same inflation data around the ends of pandemics. Inflation has typically remained weak during pandemics and declined in their aftermath, with median inflation falling below zero one year after the pandemic has ended and fluctuating close to zero for nine years after the pandemic has ended.

Figure 2 Inflation has typically remained weak in the aftermath of major pandemics

Notes: CPI Inflation (% year-on-year) around pandemics, median and interquartile range.
Source: Goldman Sachs Global Investment Research, Bank of England (2021), Schmelzing (2020).

The contrast between the behaviour of inflation following wars and following pandemics is particularly clear in Figure 3, which plots median inflation rates across the 12 wars and pandemics.

Figure 3 Inflation has typically risen sharply following major wars, but not following pandemics

Notes: Median CPI Inflation (% year-on-year) around pandemics/wars.
Source: Goldman Sachs Global Investment Research, Bank of England (2021), Schmelzing (2020)

See also, WashU Expert: Crisis or momentary blip? Explaining inflation concern (excerpt):

What’s driving inflation?

“There’s not a clear understanding of what is currently driving inflation, but most people are pointing to a couple of things,” said John Horn, professor of practice in economics at Olin Business School at Washington University in St. Louis. “First, as the economy is recovering from COVID and the shutdown, there has been an increase in demand for things people weren’t buying over the last year due to uncertainty about job future or lack of opportunity — like travel and dining out. As demand increases, so do prices. That’s one driver.”

Adding to the problem, many of the fastest growing sectors — including travel and hospitality, entertainment and restaurants — are struggling to find people to fill open jobs. These jobs typically don’t pay the best wages, and some would-be-workers are looking for better opportunities in other industries. Lack of child care and fears over COVID-19 exposure also are keeping former employees from returning, Horn said.

Another contributing factor: When the pandemic hit, companies scaled back production or, in some cases, shut down factories altogether. Now that demand is increasing, it will take time for the supply chain and production to catch up, Horn said. A highly publicized example of this is the global shortage of semiconductor chips.

“They are used in more things than might expect — not just electronic devices, but also automobiles and appliances. Even if production capacity is available, the raw material inputs are not always available. When we think of the supply shock, the supply is constrained because all up and down the supply chain, companies slowed down or shut down at the beginning of pandemic. And the startup is not instantaneous,” Horn said.

Ongoing effects of trade wars started under the Trump administration also have driven inflation.

“International trade normally lowers price because you have more opportunities for competition and lower prices,” Horn said. “The trade conflicts, coupled with COVID, have reduced that as an option for price competition.”

* * *

Horn explained inflation can be a self-fulfilling prophesy.

“It’s important for the Fed to make sure that this is seen as a temporary blip and not systemic. Because if it’s seen as a systemic problem, and inflation expectations take charge, it’s really hard to make it stop,” Horn said. “Once that happens, the only way to stop inflation is to raise the interest rates really high and cause a recession. Maybe not in 2022, but it will be on the Fed’s radar. They will want to stop [rising inflation] sooner than later.”

“However, if prices come down and people see this as a temporary blip related to COVID-19 and the supply chain problems — if that story takes hold — then I’m not worried about inflation,” he added.

Suck it up, buttercup. The economy is going through a post-pandemic recession adjustment period right now, and you will survive a little temporary inflation.