Inflation Rate vs. Prices of “Stuff”

Categories : Financial, News
November 3, 2021

Inflation is here, and depending on where you choose to get your news, it is either here to stay, or merely transitory. As a student of economics and a “seasoned citizen” who has lived through a lot of inflation (the 1970s), I believe that inflation itself is not the problem. Most inflation results from bad government policy. Inflation is a process, not an event. Increased prices are the bogeyman in my worldview.

Consider an example from physics. A steadily moving vehicle travels a predictable distance in a predictable period of time. A simple computation allows anyone to greet the vehicle at a predictable destination. However, the destination of an accelerating vehicle cannot be anticipated until acceleration stops. Right now, inflation is accelerating, and where prices will land is unpredictable.

During the year 2020, steady and low inflation rates produced predictable price levels. Knowing the beginning price point, we could easily extrapolate the ending point. Our current (accelerating) rate of inflation is leading prices to an unspecified and unpredictable higher level. During and after several more months of rising inflation, prices will climb, and when inflation abates, only then can we observe price levels.

There is currently a great debate in the media regarding inflation. The “transitory inflation” group claims that inflation’s end is near, while “Commodity Super Cycle” proponents believe we face several more years of rampant inflation. Arguments on both sides are rational, leaving readers to form their own conclusions.

During and after inflationary cycles, certain commodities experience flexible prices. Lumber has been a great example over the past several months, as prices skyrocketed before falling back to Earth like a Space-X capsule. This price action, while extreme, is emulated by many commodities, though their fluctuation is mostly more muted.

Prices of other purchases are nowhere near as flexible. Labor costs, automobiles, taxes, insurance, medical care, and many other daily purchase prices are sticky on the downward side.

Inflation is generally measured using the Consumer Price Index, or CPI, which measures the current overall price level of a basket of goods and services, and compares the result to the same figure from an earlier period. In rare instances, and over short periods, the CPI change is slightly negative. However, over any significant period, the CPI rises, reflecting the fact that our overall price level has risen.

Slowing increases in CPI simply mean that current prices, no matter how high, are still rising, just not as quickly. But you will pay more to live your daily life than ever before. Prices do not measure inflation; they measure past inflation. Future inflation merely raises your cost of living. It will not return your purchasing power to those halcyon days of yesteryear.

Beware politicians pacifying their flocks with claims of upcoming reduced inflation rates. It will not return your lifestyle to pre-inflationary levels. Consumers continue to pay more and more, wages do not keep pace, and our standard of living erodes. Transitory Inflation supporters attempt to placate us with their claim that inflation will return to 2.0% in a couple of years. At that time, a new base rate for prices will have been set. Prices will continue to rise atop that new base level.

Next week, we examine the possibility of a “Commodities Super Storm,” and its potential impact on how we live our lives.

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