Inflation

Inflation is certainly in the news and on our minds.

In a recent online group conversation, one of my friends asked the group if they believed the inflation figures given by the government.

The most recent figure release by the Bureau of Labor Statistics (March 2024) is an annual rate of 3.5% increase in the Consumer Price Index ( CPI-U is the BLS’s most used figure which tries to average out all items that consumers use). 

Almost to a person, the group of about 12 on the call said that the government’s inflation figure was much lower than they personally have experienced.  For point of reference, this was a well-educated and mostly, I would guess, progressive leaning group. 

Inflation is certainly an ongoing  issue.  It has been much higher, and much lower, at various times over the past 59 yeas since I graduated from high school and first started to take notice of price increases over time. 

Inflation is one measure of the National economy.  Other commonly referenced indices are unemployment, GDP growth and the stock market.  How are each of these doing?  

Like all important issues,  the economy is complicated and influenced by a number of variables.  Government  policy is one of these.  But “Inflation” is not the only economic factor.  Supply and demand, international/global trends and actions, and yes, simple greed, all impact the prices we pay.

Why is Inflation so Important? 

There is no doubt that things cost more than they used to.  Other indicators may be intellectually important, but inflation hits each of us in the pocket book every time we buy anything or pay for a service.  It is personal.

But “Why” are we experiencing inflation?  

Who is to blame?  The Federal Government?  State Governments?  Local Governments?

Some look only to the Federal Government.  And yet, State governors are quick to point out that their pro-business initiatives are good for their state’s economy.  Why are there significant differences in inflation rates among the different States? USA Today reports that Moody’s Analytics estimates that Pennsylvania currently has the lowest inflation rate of 1.8% and that Florida has the highest at 4%.  As Kenan Thompson says on Saturday Night Live, “What’s up with that?” 

Urban areas also can vary significantly.  I pulled a couple of most recent inceases in CPI-U  for Urban areas off of the BLS web site.  The San Francisco urban area (Which includes much of Silicone Valley) came in at 2.4% annual increase while the Miami area (which includes Palm Beach) came in at 4.4%.  Again, why the differences?

Are You better off Today?

Another statement I see online is one that I believe began when Ronald Reagan asked the question during the 1980 election campaign, “Are you better off than you were four years ago?” The Inflation rate  in 1980 was 12.5% year-over-year.   Reagon won in a landslide.

But what is the answer to that question today?

Four years ago (in May 1920) we were in the early stages of the Covid Pandemic.  On March 13, 2020, then President Trump declared a national emergency and shortly thereafter began a 6-week almost total shutdown of the American economy.

Inflation dropped to .1%, virtually nothing.  

On the down side,  unemployment was about 13% and GDP for 2020 was -2.77%.  The Dow Jones Industrial Average on May 8, 2020 was 24,197 points or about 1,000 less than in was on the same date in  2019.  Today the Dow Jones is over 36,000.  

In my previous post titled Statistics, I highlight the shortcomings of “Statistics” and clearly there are many.   I do recall however some basic economic truths that relate to supply and demand.  Fewer jobs + negative economic growth = less demand.  With low demand it is easy to see why prices remained flat four years ago.

What about “The Misery Index?”

Economist Arthur Okun, an advisor to President Lyndon Baines Johnson, is credited with coming up with The Misery Index.  The Misery Index is a measurement attempting to show the impact on “regular” people. The number is achieved by adding the unemployment rate to the inflation rate.   A high Misery Index is bad for the average American,  low is good. Since LBJ’s time, The Misery Index has been used by politicians wanting to show either how good they are doing or how poorly their incumbent opponent is doing. 

Like the formal economic indices, the question of whether we are better off now vs four years ago is not an easy answer, even with The Misery Index.  In April 2020 the Misery index peaked out for the year at 15.3 %.  The most recent number today is 7.28%.  Again, are we better off or worse off than we were four years ago?

What about Greed?  

I have seen lots of remarks online about how certain industries are showing record profits and still rising prices.  Others point out that some companies have raised prices simply “because they can” and that there is really no “competition” in many industries. 

What about the World Economy? 

As much as some people might like the idea, America is not alone in the world. 

Supply chains criss-cross the globe.  Trade between nations has never been higher.  Raw materials in one country become key to productivity in another.  International trade can become a “win – win” for many nations.  

Conversely, we all can be negatively impacted by events and conditions in other countries beyond our control:  Tariffs on American goods & Services, OPEC decisions, trade deficits, economies abroad and international corporations.  

Some people would have us believe that we should only “Buy American.” 

We do import a lot, but oftentimes the cost is less for imported goods.  Would not inflation be worse if we only bought “American” products? 

It is also difficult to tell which companies are “American”.  For example, how do you classify Toyota?  Toyota has its American Subsidiary headquarters in Plano, Texas and employs about 176,000 people in its 15 US manufacturing facilities and has over 1500 US dealerships.  RAV4s, Camrys, Corollas, Siennas, Sequoias and Highlanders are all built in the US.  And what could be more American than a truck built in Texas? All Tundra and Tacoma pickups are manufactured in San Antonio.

So what do we do about Inflation? 

I wish I knew.  Personally, I plan to reign in “extra” spending.  As a retiree, my Income is pretty much fixed.  But then so are most of my essential expenses. Fortunately much of what I spend is discretionary and can be cut.  Many others are not so lucky and they are forced to choose between two “essential” expenses. 

The answer to this important question, “What do I do about inflation?”  is much easier on an individual level:  Either increase your income or decrease your expenses, preferably both.  At the macro level the answer is much more cloudy.  

Yes, we can vote for a candidate who promises us lower inflation.  But will they be able to deliver?  And, if so, at what cost? 

Inflation is at most only partially a result of government actions or inaction.   Thinking that a political leader, any political leader, can single-handedly solve inflation is magical thinking.

Inflation is more like “Death” and “Taxes”: givens that impact us all and which no-one can control completely. 

What do you think?   Please place your thoughts/ideas in the “Comments” below.