Is inflation coming?
Illustration: Peggy Marco. Source: Pixabay
I grew up in the ‘70s. We had to plan our lives around price increases. Gas prices tripled; album prices doubled. (My kids are incredulous: “You paid for all those songs you didn’t listen to?”) There was a sense urgency. If we didn’t get to the store for what we needed today, its cost would probably go up tomorrow.
People looked for culprits, from OPEC to greedy businesses to avaricious unions to currency speculators. The government tried to impose wage and price controls, but gave up as people found ways around them. Then they tried telling us it was all our fault. A public service commercial ran with the message: “Who causes inflation? You do.”
A weak economy coincided with stagnant productivity growth, soaring monetary aggregate, and increasing unemployment. The Ford Administration cooked up its “Whip Inflation Now” campaign, with promotional WIN buttons, footballs, and even earings, but we got the sense that they were just guessing. President Ford asked Americans to send in a list of ten inflation-reducing ideas. Alan Greenspan, Chair of the Council of Economic Advisors at the time, recalls thinking, “This is unbelievably stupid.”
WIN earings. Source: Wikipedia.
The current environment reminds some people of the ‘70s. Now, as then, we have intense political polarization. Now, as then, we have easy monetary policy combined with aggressive deficit spending. Now, as then, we have a soaring stock market despite a challenging economy. People forget that the market doubled in the 60’s, and in the first two years of the ‘70s, stocks returned 40%.
But there are significant differences. Today, productivity is booming. The most significant input into inflation is unit labor costs. These measure how much it costs businesses to provide a unit of output in the overall economy – whether it’s haircuts or computers or songs we stream on our phones. They surged by over 13% in the ‘70s and were trending higher. They’re growing by only 2.4% now – around their long-term average.
Unit Labor Costs. Source: BLS, Bloomberg.
Technology provides ways for businesses to be ever-more productive. This blog, for example, would have required physical copywriting, xeroxing, addressing, envelope-stuffing, and lugging to the post office. I know this because I used to be a “mail boy” for a small investment bank, and they sent out a weekly mailing. I didn’t write anything back then, but I did all the physical stuff. It made for a busy, exhausting Friday afternoon.
Today, technology provides all kinds of alternatives. If gas prices double, electric vehicles become more attractive. If internet providers try to raise connection prices, streaming over 5g networks becomes an option. In the ‘80s Madonna sang about living in a “Material World,” but oureconomy is now increasingly dematerialized. What happens when the government creates money and distributes it via direct payments to consumers who use it for streaming services or to purchase digital tokens? Whatever asset inflation is, it’s not 1970’s-style consumer price inflation.
In addition, global demographics are dramatically different. The world’s population doubled from 1930 to 1970 and growth was accelerating. Global population growth has since slowed dramatically. Some countries are struggling with population decline, not overpopulation. China just enacted a “three-child policy” to encourage families to have more kids. Industrialization, birth control, and improvements in community health care inevitably lead to smaller families and aging populations. And older populations simply don’t consume as much.
There’s no question right now that we’re seeing a lot of factors causing prices to rise. Computer chips are in short supply due to crypto-miners; supply-chain bottlenecks are making it hard to ship goods from ports of entry to their final destination. Goods as diverse as lumber, cars, and industrial metals have been affected. Remember the Ever Given cargo ship? It was stuck for six days in the Suez Canal, disrupting shipments all over the world. And consumers have lots of cash in their bank accounts, thanks to the lack of spending options during the pandemic and government stimulus checks.
Will price increases become a persistent feature of the economy? That’s what higher inflation would mean – not one-time price shocks, but consistent, regular increases in the cost of everyday items.
The jury is out. I believe that the demographic and technological pressures will eventually overwhelm the inflationary pressures we’re seeing right now. But this isn’t certain. We’ve never had the government create so much money and distribute it to ordinary citizens. We haven’t had a post-crisis boom economy since the late 1940’s. and the Fed has been hankering after the “money illusion” of higher wages and prices. That’s why they’ve officially changed their policy from being proactive to being reactive. One observer noted that instead of waiting to see the whites of inflation’s eyes, they’re waiting until they see the back of inflation’s head.
We live in a different world than we did in the 1970’s. We’re not going to see a re-run. But the post-Covid economy will certainly bring surprises. It’s never been more important to manage risk and remain diversified.