Looking at the CPI (Consumer Price Index), the details tell a different story than might be gleaned by only considering what a tank of gas or a shopping cart of groceries is costing you these days. The unadjusted index for urban consumers increased 5.4% year-over-year (Sep 2020- Sep2021). Study the table and note that that number drops to 4.0% when energy and food prices are removed. That it increased above the Federal Reserve’s standard inflation target of 2.0% is likely the result of the pent-up demand released as the economy returns to normal. Dollars that weren’t spent in 2020 are looking to buy in a market replete with scarcity in some sectors. Energy overall increased 24.8% year-over-year, with motor fuel jumping up 42%. With transportation costs a significant part of overall food prices, increases in that sector are not surprising. The energy price spikes are doubtless driven by a combination of factors, including the impact of the pandemic is reducing demand that producers are still struggling to ramp back up to match growing demand. Factor in suppliers such as OPEC keeping production low to force price increases, couple that with production interruptions brought on by storms and the hacking of pipelines, and the result is the fragility of the fossil fuel market is exposed. Ironically, electricity prices increased 5.2% over the year.
The most basic rule of economics is supply and demand. The world is in the midst of supply-chain problems at the same time that demand is growing. But is the resulting rise in prices also a consequence of the trillions of dollars our government has pumped into the economy in the last 18 months? More dollars to spend than items to spend them on is the definition of inflation. Is that where we’re at? Or will prices drop as the various supply issues are rectified? In political terms, is this a monetary problem brought on by fiscal policy?
I do believe that the current situation is supply and demand and temporary. However, the infrastructure bill is a stimulus, and assuming it passes could certainly result in inflationary pressure that is longer lasting. I support the infrastructure program but this will be challenging times for the fed.
Since I raised the problem of the supply chain, here's a Twitter thread describing one part of that problem: https://t.co/2J8Srt8E6E?amp=1
I do believe that the current situation is supply and demand and temporary. However, the infrastructure bill is a stimulus, and assuming it passes could certainly result in inflationary pressure that is longer lasting. I support the infrastructure program but this will be challenging times for the fed.
Labor costs have also risen and finally employers are beginning to realize that 7.25 an hour is not a living wage!