Who’s really to blame for inflation?

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Last month, inflation in the US reached 6.2%, the highest year-over-year increase in more than three decades. Measured via the Bureau of Labor Statistics (BLS) by what’s known as the Consumer Price Index (CPI), a basket of selected goods like food, energy, housing and others are chosen to determine the average price.

The Producer Price Index (PPI) is also tracked by BLS to find the average change in selling prices of various goods over time as another way to look at price inflation. That rose a whopping 8.6% year-over-year in October.

Energy costs rose 4.8% in October alone, with gas prices rising more than 6%. The BLS estimates energy became 30% more expensive in the last 12 months. In Maine, home heating oil is 66% more expensive today than it was this time last year. Just in the last week, the Maine Public Utilities Commission (PUC), the state agency which regulates energy utilities, authorized the raising of standard offer rates by 88% and 83% for both of the state’s largest power companies, Versant and Central Maine Power, respectively. This will mean that the average Maine residential power customer will pay about $30 more for electricity every month.

As the state with the highest median age in the nation, the recent inflation is hitting Maine hard. Senior citizens make up more than 20% of Maine’s population, and those households earn just over $40,000 per year on average, which is less than the US average for those aged 65 and older. Maine has the second-highest ratio of seniors to the under-65 adult population in the nation, just behind Florida.

In 1990, the last time the CPI broke 6%, US economic growth, as determined by US gross domestic product (GDP), had grown an average more than 4% over the previous eight years. Today’s economy is experiencing labor shortages, supply chain crises, persistent confusion about the status of the pandemic driving both of those factors, as well as sustained price inflation.

While our current territory is surely uncharted, the more apt comparison might be to the stagflation of the mid-1970s rather than the pending boom of the 1990s.

Worries about inflation are no doubt affecting the nation’s slow economic recovery. Even back in March of 2021, a Civic Science survey found that 77% of Americans were at least somewhat concerned about inflation. Concern was spread fairly evenly by age, with those over age 55 expressing the greatest worry. This makes sense, as the elderly are more likely to live on a fixed income and may be more familiar with inflation from the past.

A Fox News poll in June found 86% of Americans were concerned about inflation, with 70% noting increasing grocery prices, and with 67% saying rising gas prices are causing hardship for their families.

Multiple polls conducted over October and November show Americans are seeing the results of inflation firsthand, with more than two-thirds reporting having “recently experienced sharp increases in the cost of items they would like to buy.”

Americans who rely on fixed incomes derived from a combination of Social Security, savings, or IRA disbursements are among those hurt the most by inflation, as the dollars sitting in their accounts are worth progressively less with every passing month. The rest of the economy doesn’t escape hardship, though. Small businesses and the middle-class families who support them pay for it as well.

More than 99% of Maine businesses classify as  “small businesses” since they employ fewer than 500 people. According to 2019 data from the US Census Bureau, 57% of these firms have fewer than five employees, and about 30% have between five and 20 employees, yet they employ more than 450,000 Maine workers.

The most recent Road to Recovery Report, a survey from the small business networking site Alignable, found that 73% of small business owners still haven’t recovered from the pandemic slump. About 90% of those surveyed said they are concerned about inflation; 48% are “highly concerned.” Inflation fears far-and-away represented the greatest concern of this cohort. Three out of four retailers have yet to recover their pre-COVID monthly revenues with one-in-four “on the brink of closing for good.”

The recent jump in inflation is not unique to the US either. Europe is experiencing it as well, with 80% of British businesses reporting hardship due to inflation earlier this month. CNBC reported the recent spike is “worse than expected” in the UK as inflation there hit 4.2%, the highest in a decade.

Some who favor even greater public spending will use this data to obfuscate and build a straw man against the harms of inflation. They will say, “surely Biden can’t be responsible for inflation in Europe, too” and distract from the true culprits of runaway inflation: central banks. Public policy is driving inflation, but not in the way we might assume.

Yes, the federal government’s fiscal policy (taxes and spending) have a role, but not one equal to the central bank of the US, the Federal Reserve, or “the Fed.” The sort of structural inflation we now face has more to do with the overall supply of money. It occurs when more dollars follow the same amount of goods and services produced. 

When the government spends what it has saved, the same amount of dollars circulates in the economy. When the government spends what it does not have, it borrows to pay for new projects and programs, incurring debt. Sometimes, this money is literally created out of thin air, added to banks’ balance sheets by the central bank. The Fed’s creation of dollars when the federal government continues deficit spending empowers spending by reckless politicians from both major parties. 

Tasked with directing the nation’s monetary policy, the Fed targets inflation and economic growth using several tools. It controls the supply of dollars in the economy by buying and selling US Treasury bonds, as well as being the “lender of last resort” to domestic and foreign banks. Foreign central banks like the European Central Bank have overleveraged themselves so much that the Federal Reserve is picking up some of the slack, driving inflation around the globe by buying up bonds issued by other profligate governments.

The greatest federal spending spree ever marks this era. More than one-fifth of all US dollars in circulation have been created since February 2020. The Fed has monetized nearly 40% of US debt in the last year, amounting to almost double the amount it held pre-pandemic. Since the federal government spent trillions upon trillions over the last 20 months, this totals more than $4 trillion in debt added to the central bank’s balance sheet since before COVID. This is the predominant force behind the inflation we are seeing today, and the primary reason why it will not be “transitory” as President Biden and his advisors say.

As much as Biden and big-spending DC politicians are to blame, the Fed has enabled their profligacy by turning around and buying debt incurred through deficit-spending, leaving taxpayers with few escape hatches.

Stephen Roach, a former Fed economist, said in a recent interview on CNBC that the central bank is “in denial” about the reality of inflation, with “no institutional memory” on how to deal with the shocks currently weighing on the economy. Roach expressed his belief that the Fed should deal with interest rates first, by allowing them to rise and protect against stagflation. It can better protect against inflation by encouraging savings, instead of encouraging more public debt. 

This would surely help the average American family in the long-run. As inflation begets more inflation, wages don’t always keep up with prices, which hurts the working-class the most. With current labor force issues contributing to massive supply chain shocks, everyday Americans will be farther behind in the struggle to afford the quickly rising cost of living if the long-term fiscal situation remains unchanged. Something’s gotta give.