Deniers of Inflation are Fueling Inflation

Categories : Financial, News
August 11, 2021

Americans everywhere are talking about the elephant in the room, but Congress and the Biden Administration remain in denial. Ditto the Federal Reserve (FED). That beast is inflation, and only Americans of a certain age can remember the last time consumer prices escalated with the ferocity we are experiencing today. Our current situation was not inevitable; it is the direct result of bad economic policies.

Extreme spending by the Administration and Congress is creating demand for goods and services that are not yet in sufficient supply. “Emergency” Unemployment Compensation Benefits being paid to potential workers are keeping capable people on the sidelines of the job market while lining their pockets with spendable cash. Economics 101 teaches us that when Demand exceeds Supply, the variable is Prices, which rise.

Before the pandemic of 2020, inflation was nominal, although even then it was understated by these same deniers. Our impulsive “shut it down” response to COVID-19 caused millions of job losses, and resulted in shrinking demand for goods and services. Individuals and families lost purchasing power, and for a short time, deflation was the result. But that was over a year ago, and the situation has now reversed.

When the current economic recovery began in April of 2020, deflation was halted. Demand for most everything soared, and shortages of available consumer products caused panic-like buying. To this day, some store shelves remain vacant of necessities such as toilet paper and household cleaners. Many car lots are sparsely populated with vehicles, new or used, awaiting semiconductors produced primarily overseas by companies affected by COVID-19 production limitations. Rental cars are unavailable in many locations.

Resulting from this “perfect storm” of economic disruption is rampant inflation. We are being assured by Administration “experts” that the current inflationary cycle is transitory. This, too, will pass, according to them. When is anyone’s guess, and my estimation is later. Much later. Inflation is being fueled by policies that will not be improved for years.

At the core of the problem is energy policy. Having voluntarily relinquished our nascent 2020 energy independence, oil prices have skyrocketed. Virtually everything we do, and everything we use, is impacted by the rising price of petroleum. Transportation and manufacturing are greatly impacted by oil price increases. Electricity, currently undergoing spiraling demand, is largely derived from coal and natural gas. Yet every day, domestic oil and gas production are being curtailed by nonsensical energy policy, in a fanciful flight to “renewables.” As prices rise, workers demand higher wages, which are granted of necessity, though mostly at a pace slower than inflation. In turn, rising labor compensation pushes up prices of labor’s output, and the cycle feeds on itself. Prior to the next Presidential election, there is little chance of the inflationary cycle being interrupted by Don Quixote officials, forever tilting at windmills.

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