Is America Prepared for the Inflationary Impact?

(The National Interest) After a decades-long hiatus, inflation is back in the news. So far, the figures this year are startling, and as anyone who remembers the great inflation of the 1970s and 1980s knows, inflation, once it gains momentum, can devastate financial markets, distort economic decisionmaking, and severely limit growth prospects.

In the face of such concerns, Washington has shown little more than a kind of insouciance. Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen have told Congress not to worry and assured all and sundry that the inflationary pressure is “transitory.” More recently, President Joe Biden has likewise waved away concerns.

Though there is considerable evidence that today’s inflation is a delayed response to years of excessive monetary ease, the nation should hope that Washington’s establishment is correct and it will abate soon. The alternative would be painful for citizens, investors and politicians. 

Washington’s easy assurances aside, the data available can only be described as troubling.

The Labor Department’s consumer price index (CPI) has risen at a 7.3 percent annual rate so far this year, up from 0.2 percent in 2020 and an average yearly rate of 1.5 percent for the prior five years, 2015–2019.

Producer prices have risen at well over a 10 percent annual rate so far this year, compared with 0.5 percent in 2020 and a 0.2 percent average yearly rate of increase between 2015 and 2019.

The stakes are high. Inflation, once it embeds itself in people’s expectations, distorts everything in the economy, none of it to any good.

At the most fundamental level are the uncertainties it fosters about the future value of anything denominated in dollars. Planning becomes impossible. Businesses become reluctant to make the long-term investment decisions on which economic growth depends.

Inflation takes on a life of its own as wage demands build in expectations of the future cost of living increases, and pay agreements assume that rising prices will compensate for inflated wage hikes. This self-sustaining pattern makes any efforts to ease the pressure that much more difficult.

Stocks, bonds, and other financial instruments are denominated in dollars, which means investors see them in favor of assets that they believe will rise in value with the inflating cost of living. These assets consist mostly of real estate but also gold, other commodities, art, antiques, and the like. Perhaps today’s real estate surge is a sign that this kind of unproductive adjustment has begun. 

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