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Opinion Don’t lose sight of the inflation monster

A "sale pending" sign is posted outside a single family home in Derry, N.H., on July 14. (Charles Krupa/AP)
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August’s inflation report was heralded as a sign that rising prices are slowing down. If only that were true.

People so want to believe that inflation is temporary that they will seize on any good news as a silver lining. That’s what happened this week when the monthly consumer price index data was announced. The “core CPI,” which excludes prices from the food and energy sectors, rose at 0.1 percent, while the full index rose at 0.3 percent. Both rates were lower than the previous month, leading to reports saying that inflation has peaked and the worst was over.

That’s highly unlikely to be true. Americans are sitting on trillions of dollars of savings they accrued during the pandemic, largely because of the stimulus checks that were sent to people regardless of their need. Personal income is also much higher today than it was before the pandemic, despite the fact that millions are still without work. That’s because the federal government continues to give trillions of dollars a year to people who never lost their jobs or saw their wages cut. The increased child tax credit, something almost all Americans with young children now get monthly, is just one example of how people who have made it through the pandemic relatively unscathed economically have money to spend they never had before.

People with money to burn will not be daunted by rising prices. Many who are looking to buy a house have the savings to get into bidding wars, which is one reason housing prices are more than 15 percent higher this year. Families that now get up to $300 a month per child from Washington will spend that money, allowing them to pay higher prices for food, gas and everything else. That is why inflation is still running at a 5.3 percent annual rate despite the recent slowdown.

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The Federal Reserve’s current low-interest rate policy also encourages consumer spending. Higher interest rates discourage borrowing and encourage saving. That’s why raising interest rates is always the central bank’s first weapon deployed when it wants to fight inflation. Its current policy of charging nearly zero percent interest rates has the opposite effect. Near record-low mortgage interest rates, for example, are clearly another reason why housing prices are skyrocketing.

The government’s willing blindness to the inflationary pressures that are building is already hurting vulnerable Americans. Much has been made of the rapidly rising wages many workers in historically low-paid industries are receiving. Less noticed is the fact that inflation has already wiped out those gains.

It’s been so long since the United States has suffered from endemic inflation that most adults are unprepared for what it will do. Annual 5 percent inflation may seem low, but it’s not. Because each price rise is built on the previous one, a 5 percent annual rate means that prices would double every 14 years. Moreover, an average growth that large would surely have years when prices spiked much more than that. This lack of certainty reduces investment as businesses can’t be sure whether they will get a solid rate of return. That, in turn, reduces employment and wages.

Inflation also has a tendency to grow as people try to stay ahead of the monster devouring their earnings. That’s what happened in the 1970s. Inflation had risen to 6 percent annually by mid-1970, leading President Richard M. Nixon to impose the country’s first peacetime wage and price controls. This artificially reduced inflation temporarily, but it roared back when the controls were removed. Inflation remained high for the entire decade, dropping occasionally but always coming back and rising to new heights.

Only the massive rise in interest rates engineered by Federal Reserve Chair Paul Volcker in 1981 and 1982 finally broke inflation’s back. The cost of Volcker’s measure was high: unemployment at nearly 11 percent and the deepest recession at that point since the Great Depression.

Inflation has been likened to cancer because it starts out small and acquires its deadly character as it grows and spreads. That’s likely where we are now, with the inflationary tumor present but not yet spreading throughout the economic body. The federal government needs to stop it now, when it can. That means cutting sharply back on the unnecessary government spending that is driving up personal income and hiking interest rates to tamp down on the consumer frenzy. Anything less will mean inflation will continue to rise to levels unseen in decades.

President Biden wants to be seen as good old Uncle Joe, giving away presents to a happy and grateful national family. If he lets inflation grow, he’ll instead end up being seen as the man who gave Americans a lump of coal.