By Philip Klein
Thursday, June 10, 2021
For the last decade or so, as the nation’s debt grew
and the Federal Reserve kept pumping money into the financial system, there
were periodic warnings about the risk of inflation. Yet these fears were never
actually realized. As a result, in the face of growing signs of inflation, many
people — including the ones who happen to run our nation’s fiscal and monetary
policy — aren’t taking the current threat all that seriously. This is
worrisome, because in reality, a growing body of evidence — major economic
indicators and announcements from small and large businesses — suggests
that inflation is quite real.
Consumer prices leapt 5 percent in May year-over-year
after gaining 4.2 percent in April, with some sectors experiencing gains not
seen in decades. The growth of the money supply has
been off
the charts. A survey by NFIB, the largest advocacy group for small
businesses, found that 48 percent of businesses reported raising prices,
compared with just 5 percent who reported lowering prices — the widest
gap since 1981. In addition, Factset found that in the first
quarter, more S&P 500 companies brought up inflation in their
earnings calls than any other quarter since the data firm began
keeping track in 2010.
Costco is one of the largest retailers in the U.S., with
a product line that ranges from diapers to funeral caskets and includes much of
what one would need to live on in between. As a business that deals in massive
volume and relatively low margin, its executives have to be acutely aware of
trends in pricing. And in last month’s earnings call, they were quite clear
about where things have been heading. “There have been and are a variety of
inflationary pressures that we and others are seeing,” Richard Galanti, the
wholesale club’s Chief Financial Officer, said. He continued:
Inflationary factors abound. These
include higher labor costs, higher freight costs, higher transportation demand,
along with the container shortage and port delays that I mentioned, increased
demand in various product categories . . . various shortages of everything from
chips to oils and chemical supplies by facilities hit by the Gulf freeze and
storms and, in some cases, higher commodity prices.
In the previous call in March, he recalled being asked,
“At what level we felt inflation was running overall at that time with our
goods.” He explained, “I stated that our best guess was somewhere in the 1
percent to 1.5 percent range. As of today, we guess that overall price inflation
at the selling level, and excluding our gasoline sales, would be estimated to
be probably more in the 2.5 percent to 3.5 percent range.”
Home Depot, another mega retailer, smashed earnings
forecasts because the company was able to successfully pass along to consumers
staggering increases in prices for commodities such as lumber and copper. Ted
Decker, the company’s chief operating officer, told investors about the stunning cost of Oriented
Strand Board (OSB), which most modern home builders use instead of plywood to
help construct floors, walls, and roofs. “At the end of the first quarter last
year, a sheet of seven-sixteenths OSB was approximately $9.55. As we exited the
first quarter this year, that same sheet of OSB more than quadrupled in price
to $39.76.”
The increase in lumber prices — because of surging demand
and COVID-related supply disruptions — has added nearly $36,000 to the price of
a new home, according to the National Association of Home
Builders. And it wasn’t just new homes that have been getting more expensive.
The median sale price of homes hit $370,528 in April, up 22 percent from
2020, according to Redfin. It took just 19 days for the average
home to sell and 49 percent of homes sold above asking price, both of which
were records since the real-estate brokerage began tracking data in 2012.
The optimists, including those at the Fed, believe that
the current inflation is temporary — a combination of demand spiking as the
economy reopens while the supply chains haven’t fully recovered from the
disruptions of the pandemic lockdowns. But this understates the scale and scope
of what we are seeing. There are reasons to believe that the current moment is
different from previous economic recoveries.
The Great Recession of 2007–2009 involved a system-wide
financial collapse, creating lasting deflationary pressures, and the recovery
was historically slow. However, the U.S. economy was fundamentally strong in
early 2020 heading into the once-in-a-century pandemic, and it quickly started
to recover as soon as businesses started being allowed to reopen. Many states
began easing up coronavirus restrictions in the middle of last year. In the
third quarter of 2020, real GDP increased 33.4 percent. And in the fourth quarter — which concluded
weeks before Biden took office — growth was 4 percent.
In about a year’s time, the federal government has pumped
$6 trillion in COVID-relief money into the economy, on top of the trillions
that the Fed has been releasing through near-zero interest rates and bond
purchases. While some of it may have been necessary to prop up the economy
early during the lockdowns, it was clearly excessive by the time of
Biden’s $1.9 trillion bill passed in March. The legislation he signed was nearly triple the projected output gap. Now, Biden is
pursuing an additional $4 trillion in new spending on top of what he already
signed. His budget projects that this year, the federal debt as a share
of the economy will surpass the record previously set by World War II and will
exceed that level every year over the next decade.
What was also unique about the pandemic lockdowns is that
while they had dramatic economic effects on certain industries reliant on
socialization, for those who were able to work at home, they were a huge
financial boost. These Americans continued to be paid; yet with so many things
closed, their spending declined, and they were able to pocket government
checks. Qualifying married couples received $6,400 in checks over the course of
three rounds of relief legislation. Now, Americans are coming out of the
lockdowns with $2.6 trillion in excess savings. For those without savings,
it isn’t clear that they will hold back on spending, either, especially given
the persistently low interest rates. A report from Creditcards.com found that 44 percent of
Americans plan to take on debt to “treat themselves” as the country emerges
from the pandemic.
The unwillingness of the Fed to take inflation concerns
seriously puts the economy at grave risk, because once inflation gets going, it
will be hard to get under control. With debt at historically high levels, it
will also be difficult for the Fed to play catch-up later by raising interest
rates. With debt expected to exceed $24 trillion this year, American taxpayers will already be
on the hook for $300 billion in interest payments just to service the debt. For
each percentage-point increase in interest rates, the Committee for a
Responsible Federal Budget estimates that those payments will increase by over
$200 billion, or about $1,800 on a per-household basis.
It’s time for policy-makers to recognize that this is not
a drill.
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