“Predicting is hard. Especially about the future.” That realization was on display when the Federal Reserve Board once again revised up past inflation predictions. Not only have 2021 prices increased at a higher rate than expected, but what has been billed as temporary inflation is looking to last longer. The Wall Street Journal recently piled on with the oxymoron headline, “Fed Officials See ‘Transitory’ Inflation Lasting Quite a While.”
The latest Commerce Department data shows year-over-year inflation amounted to 4.3 percent. That’s the quickest rise over 12-months in 30 years. An alternative inflation indicator measured a 5.3 percent jump over the same period. Average hourly earnings simultaneously grew by 4.3 percent. As prices rise, purchasing power weakens, and wage gains erode.
Too many adults don’t have the cautionary memory of double-digit inflation during the 1970s. Nor did they experience the Mideast oil embargo when you could only buy gas on odd or even days depending on your license plate number. It all added to paralyzed economic growth.
The real danger posed by inflation, both then and now, is once it starts, it’s difficult to stop. Expectations of higher prices become a self-fulfilling prophecy. Consumers are incentivized to accelerate purchases in the short term, creating supply pressures and price hikes. America experienced similar fear-driven behavior in 2020 over toilet paper.
To tame the unhinged inflation of the Carter era—which peaked at 13.5 percent—then-Fed chairman Paul Volcker aggressively hiked interest rates. By 1981, they had reached 20 percent. The average 30-year fixed-rate mortgage neared 19 percent. Compare that to today’s rate of about three percent. The restrictive money supply strategy worked. But not without triggering a recession. Intense periods of inflation often precede these economic downturns with greater difficulties finding employment.
The Fed now appears to be moving responsibly to avoid the scenario. But Congress is toying with a contrary reality of “alternative facts.” Democrat lawmakers spent the past few weeks attempting to push through a $3.5 trillion budget which amounts to five or six trillion dollars after stripping away accounting tricks. An additional trillion-dollar infrastructure package is also on the table.
The president now claims the cost of these proposals will be “zero.” The soon-to-be-renegotiated multi-trillion dollar tab for the 2,468-page bill has every page representing an average of $1.4 billion in new spending. Tax hikes may be proposed, but tax strategists will always find new ways to lessen the burden. The net result will pressure prices to rise further.
The earlier reference to Carter-era inflation and fuel shortages may be prescient. President Joe Biden’s hostility towards fracking, natural gas, and oil exploration are contributing to global oil shortages and higher energy prices. We still have Americans and allies stranded in Afghanistan, a situation that conjures memories of the 1979 Iran hostage crisis. And progressive elements in Congress with little real-world wisdom are hungry for more government entitlements ranging from free college to richer programs we already borrow to fund. It all adds up to a spiraling crisis of confidence.
Spanish philosopher George Santayana warned, “Those who do not remember the past are condemned to repeat it.” We can do better.
• Richard Berman is the president of Berman and Company, a public affairs firm in Washington, D.C.