You may have noticed that a trip to the store is getting more expensive. Prices on just about everything from food to gas to electricity have ballooned.
Do policy makers understand inflation? Or do they simply not know what to do about it? That seems to be a serious question at the moment. Political narratives for the last few months have tried to mitigate price increases as a problem.
Most members of the public have noticed the sharp increase in prices they are paying on basics. Notably food. As the Consumer Price Index records a 6.2% inflation in the last month in the US and 4.7% in Canada, the highest recorded in decades, governments seem oblivious to recognizing the cause.
Inflation is defined as a progressive increase in prices. This can be caused by a surplus of cash or lack of various goods. Or you can be in the situation we are in at the moment where both are true. In the case of the latter the value of a particular item increases due to it becoming more scarce. In the case of the former it can be either money being put into an An economy without increases in production or labour being paid more for the same level of economic output.
In the current situation there is both a decrease in production, largely a result of lockdowns from the pandemic and increasing government benefits being paid out over the last few years. There has been pressure on supply chains, many of which have been disrupted by border closures and shortage of raw materials, with lockdowns driving consumer demand up as well.
Of course on the public policy level the increased individual benefits from unemployment support programs have led to burgeoning government deficits as the fall in economic output has reduced tax revenue at the same time. While it is easy to defend the government increasing assistance for those affected by COVID-19 it doesn't change the problem of flooding an economy that is contracting with excess liquidity. The net result is that the value of money will decrease.
The argument that this inflation was simply transitory made by central banks and Treasury departments seems more to be a case of giving governments cover from the fact deficits are one of the causes. The narrative says that transitory inflation was simply a product of the COVID pandemic restricting supply, reducing the amount of product production that was being made for the economy. This argument requires direct incentive for producers to increase their output. Thus far there has been mixed signals on this,at best. Some governments have gone back into driving production down again with further lockdowns.
It is becoming more apparent that price increases are here to stay. Until economies are able to start increasing output back to levels that could be seen as being relatively normal.
That the pandemic helped start the radical rise with governments imposing lockdowns. For health çonsiderations these may have been appropriate. One of the side effects that has been glossed over is it would cause serious decreases in production levels. There were some alarms sounded early on in some sectors (such as food) about possible shortages. Generally, most governments played down these concerns over the optics of keeping people healthy.
What is being blurred is the effect of government deficits. Governments spending the way they have increases money supply making a dollar worth less. It should also be noted that it is those with lower incomes that are hit hardest by these policies.
One policy tool usually employed is increasing production. Governments trying to encourage economic growth making important items more readily available. Instead you still have most pandemic policies in a number of jurisdictions keeping supply down and difficulty in transporting goods. As long as supply is depressed there will be upward pressure on prices.
However, governments of all stripes have become dependent on using spending to solve every problem they encounter. Continually flooding more money, typically borrowed money, into markets will inevitably make it lose value. This is not a viable recipe for long term prosperity.
There has been some pushback from some in the progressive side that inflation could be good. This premise points out those with debt see an advantage as the value of money goes down, their debts are lower'. Conversely those who are owed money, the opposite is true. That may sound like making the two more equal, but I would suggest the price issue was a bigger one for both of them. This argument is trying to put up a distraction.
Until there is a concerted effort to get more products to market or a tighter control on the money flowing into the economy we will continue to see increasing inflation numbers. Unfortunately, this looks like a problem that will get worse before getting better.