About Unnecessary Inflation

Categories : Financial, News
August 18, 2021

August’s release of the July Producer Price index (PPI) showed an increase of 1.0% for July, following an increase of 0.8% in June. The earlier Consumer Price Index (CPI) showed annualized gains of over 6% and accelerating. Gasoline at the pump is up about $1.01 per gallon since this time last year. Inflation is here, everyone is feeling it, and it is a shame.

That is the current economic picture, and it did not have to happen. Last week we wrote about poor energy policy in the U.S., which is at the core of the national inflation problem.

Energy is not the only component of rampant inflation. Economics 101 teaches us that there are four Factors of Production: Land, Labor, Capital, and Entrepreneurship. Each can contribute to inflation or deflation, depending on the overall economy, national policy, Americans’ expectations, and a host of other contributors. Unfortunately, politics is at the heart of many factors.

Land is plentiful and affordable, but our energy policy is taking millions of acres off-limits for energy exploration and drilling. This adds to the inflationary cycle by driving oil purchases offshore to competitors, many of which are not friendly to the USA.

Labor is in short supply, due to poor economic policy. Available jobs are now over 10 million, and people are reluctant to fill them until excessive Unemployment Compensation (U/C) benefits dry up (currently slated for September 6, 2021).

Capital is cheap, brought to us by poor FED policy. “Easy Money” is supposed to be a tool used by the FED when the economy is in bad shape and needing a jump start. While that was the case about a year and a half ago, today’s strong recovery requires raising interest rates to dampen inflation.

Entrepreneurship is a hallmark of the American experience, fueled by opportunity, education, and availability of the other three Factors. Today, Land is plentiful, Capital is cheap, but Labor shortages and expenses are problems for existing employers. Potential new entrepreneurs are aware of labor market conditions and are holding back new products and companies.

Economic policy is a large component of inflation. Yet another problem is active in the political class as we speak. Regulatory costs and threatened increased taxation are passed along to customers, fueling inflation.

Pay increases at the national level are running about 4% annually. Inflation at the current level exceeds labor increases, creating a lower standard of living. Thomas Jefferson famously said, “You get the government you elect.”

Is it 2022 yet?

Van Wie Financial is fee-only. For a reason.