2021-11-19 04:03:10 UTC
one of the token libs at WSJ. How dare he dispute the party line!
POLITICS & IDEAS
Strap Yourself In: Inflation Isn’t Going Away
An aging workforce and trade in retreat—such price pressures won’t soon
By William A. Galston
Government reports released last week have put inflation on top of the
economic-policy agenda. During the past year, consumer prices rose by 6.2%,
the fastest rate in more than three decades, and wholesale prices rose by
8.6%. The core price index, which excludes volatile items such as food and
energy, rose 4.6%.Many of the specifics are eye-popping. The price of fuel
oil has risen by 59% in the past 12 months, gasoline by 50%, and home-
delivered natural gas by 28%. The cost of new cars and trucks is up 10%, used
cars and trucks 26%, car and truck rentals 39%. Furniture costs 12% more;
rents and housing prices are moving up fast. Grade A eggs are up to $1.82 a
dozen from $1.41 a year ago; a pound of chuck roast rose to $7.40 from $5.75.
Wages also increased at their fastest pace in decades, but not enough to
compensate for rising prices, reducing real wages by 1.1%. Not surprisingly,
Americans’ expectations for inflation over the next year hit a record 5.7%
As recently as the end of August, Federal Reserve Chairman Jerome Powell was
still arguing that the rise in inflation affected a “relatively narrow
group of goods and services,” a stance he has since abandoned. But Treasury
Secretary Janet Yellen, senior administration economists and Mr. Powell
continue to insist that the current inflation spike will be “transitory.”
The date things will return to normal keeps getting pushed back.
Mr. Powell and others may be right, but the evidence against their position
is accumulating. Most U.S. firms are reporting limited consumer resistance to
price hikes. Households have built up more than $2 trillion in saving thanks
to government transfers and less spending during the pandemic. For
upper-income households, the “wealth effect” is boosting their demand for
goods and services.
Economists old enough to remember the 1970s point out that the decade’s
wage-price spiral was spurred by automatic cost-of-living wage increases,
which have all but disappeared. They may be making a comeback. John Deere’s
latest offer to its striking workers includes an automatic cost-of-living
adjustment, and other companies could follow suit to compete for workers.
Two of the factors most often blamed for disruptions that lead to price
hikes—shortages of computer chips and the snarled supply chain—won’t
abate as quickly as policy makers hope. The chairman of Intel has predicted
that global demand for chips will exceed supply well into 2023. In the
interim, auto makers will continue to compete with the electronics industry
for scarce supplies. Many auto companies are responding by cutting back on
lower-cost, lower-margin models in favor of more-expensive ones—not a
winning formula for reducing inflation.
Problems with the supply chain run deeper. Even if the Biden administration
succeeds in getting the nation’s ports to operate around the clock, other
choke points, such as overwhelmed railroads and the shortage of warehouse
space, will continue to slow the delivery of goods. Worse, a wave of
retirements and resignations has produced a shortage of about 80,000 truck
Most fundamentally, the forces that produced four decades of declining
interest rates and low inflation have halted. The U.S. labor force, which
grew by 1.6% annually in the 1980s and 1.3% in the 1990s, is projected to
grow by only 0.5% a year in the current decade. Politics continues to stymie
the immigration reforms needed to plug the gap.With an aging population at
home and throughout the industrialized world—including in China— slow
labor-force growth will exert persistent upward pressure on wages. As the
elderly spend a portion of their savings and transfer the remainder to their
children and grandchildren, consumer demand will increase. Absent faster
increases in productivity, more inflation than we’ve seen during the past
40 years is likely.
Open trade and global supply chains are on the decline. Intensifying
competition between the U.S. and China and the populist revolt against
economic liberalization help explain this shift. The pandemic has exposed the
vulnerability of globalized systems. Business leaders will give more weight
to resilience, at some cost to efficiency. To reduce risk, some production
will move to the U.S. or friendly countries closer to home, adding to upward
pressures on labor and other costs.
In the very long term, the fight to slow climate change could reduce energy
costs, but this seems unlikely during the next two decades. Although coal has
enormous negative effects on the environment, it is comparatively cheap, and
the shifttoward electric vehicles won’t happen fast enough to reduce demand
for gasoline any time soon.In considering the next steps, the Biden
administration and the Fed should give much more weight to the evidence that
emerging inflationary pressures are structural—not temporary.