Inflation and the American Worker
If you watch TV news, you’re shaking your head at a Consumer Price Index (CPI) of 7.5%. You’re wondering how can that small amount be so painful? Well, it’s because you see much more than 7.5% at your local gas station and grocery store. The truth is that the CPI average does not reflect the breadth and depth of inflation across all markets and products in America. It is, after all, an average.
In key items like fuel, energy, and vehicles, inflation is up 25-45%. It is an American Worker’s pain point.
For the average American worker, inflation is a thief that steals a portion of his/her paycheck each week. Looking at this inflation chart, it’s easy to see this may not be the best time to buy a used vehicle or take that long scenic drive vacation.
President Biden was presumably talking to American businesses when he said: “I have a better plan to fight inflation. Lower your costs, not your wages.”
Excuse me, Mr. President. Inflation has only one root cause: too much money is chasing too few goods and services.
How much money did the Federal Reserve put into the American economy in 2020?
This chart represents the supply of money available in the US over years. It doesn’t take a rocket scientist in America to see the problem.
Starting with a money supply of ~$4.3 trillion: “The Fed pushed the money supply higher by nearly $3 trillion or 70% throughout 2020.” -Investing.com
The same Investing.com also said: “The Fed and Treasury are playing a dangerous game. The numbers we discuss above are massive and dwarf anything seen in American history.”
America had a 70% increase in the money supply in one year!
It is a gigantic problem, Mr. President, and it has nothing to do with wages or materials.
But what about goods and services? Is America producing enough goods and services to absorb the impact of all that new money in the economy? Not even close.
The pandemic decreased the availability of goods and services across America. People were not working, and production decreased. Manufacturers laid people off and many simply closed their doors. The impact on GDP was enormous.
Too much money, too few goods. This is fuel for inflation. America needs less money in circulation and more goods and services if it’s going to fight the inflation rate. It may take years before the production of goods and services -at current rates- will consume the $3 Trillion the Federal Reserve put into the economy. The “real GDP” line above will take a long time to return to the rising 2017 levels.
It takes three legs to make a stable stool. In order to stave off more inflation, America also needs three legs: workers with jobs, increases in manufacturing, and a sound monetary policy. Less money in circulation will help the overall situation, but can the Fed shrink the size of the money supply successfully?
There are three types of inflation that America’s working and retired people will face for the next several years:
Demand-Pull inflation: Demand-pull inflation occurs when an increase in the supply of money and credit stimulates overall demand for goods and services in an economy to increase more rapidly than the economy’s production capacity. This increases demand and leads to rising prices. And $3 trillion is a massive increase in the money supply.
Cost-Push inflation: Cost-push inflation results from the increase in prices working through the production process inputs. In other words, when energy costs go up to produce goods or services, then the price of the final product goes up. Whether it’s energy or wages or taxes or the price of tea from you-know-where, the prices of goods and services rise as the costs of production components increase. You only need to see that fuel and energy costs are up 25-45% to know we have more inflation ahead of us.
Built-In inflation: As the price of goods and services rises, workers and others expect that they will continue to rise in the future at a similar rate, and they will demand more wages to maintain their standard of living. Their increased wages result in a higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa. This is what future Federal Reserve policies hope to achieve. They seek a sustainable 2% inflation rate, but the real question is: “Is it achievable?”
Inflation is a problem for ordinary people who live paycheck to paycheck and whose wages can’t keep up with inflation every month. It’s also a problem for all boomers who retired on fixed incomes. And it’s a problem for young families trying to get ahead. It will be a challenge to save a down payment for a new home or vehicle with inflation taking more and more of a person’s paycheck every week.
The Reform Party of the USA agrees with President Biden that expanding American production is a long-term solution for American workers and the economy.
However, the money supply, the amount of money we print, and the amount of debt the country owes others also contributes to the inflation rate and must be addressed.
The solution for America is reform through a balanced budget, fiscal responsibility, and better-paying jobs for American workers.
The Federal Reserve says it targets an inflation rate of 2% in the future. This is welcome news but color us skeptical.
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