Wayne O'Leary

The Real Inflation

As 2022 draws to a close, the year’s primary political concern (policywise) seems to be easing. Inflation in the US, which was 5.4% in September 2021, peaked at 9.1% this past June and has since drifted down to 7.1% as of early December.

What economists like to call “core inflation”; that is, the inflation level absent food and energy costs, has lessened, yet only to a degree. Gasoline prices, which fueled last summer’s dramatic upsurge, have moderated, but food prices have not. This means average Americans can now drive to the grocery store, but may not be able to afford much when they get there. And 7.1% inflation, no matter how you slice it, is still burdensome in the extreme for those without hefty incomes.

The Federal Reserve Board, chaired by Trump appointee Jerome H. Powell, who was inexplicably reappointed (2021) by Joe Biden, has the answer. In homage to his celebrated predecessor and hero from the 1980s, Powell plans to go the full Volcker if necessary, wrestling inflation to the ground with high interest rates, no matter the collateral damage. On Paul Volcker’s watch (1979-87) that meant a 20% prime rate and 10% unemployment — to the delight of the big Wall Street banks, which prospered as never before through foreign investment.

At year’s end, Powell, bolstered by a 4 to 3 Republican majority at the Fed (three, including himself, installed by Donald Trump), had raised federal interest rates seven times in 2022, from 0% to 4.5% — not quite Volcker territory, but the most abrupt upward adjustment in 40 years and the highest level in a generation. He’s expected to raise that to 5.1% in early 2023 and not consider a downward revision until late 2023 or 2024 at the earliest.

Powell’s recent public pronouncements reveal his inflexible mindset. “It is premature to think about pausing,” he commented on his current rate offensive in early November. “We will keep at it until we are confident the job is done.” Restoring price stability would require “holding policy at a restrictive level for some time,” the Fed chairman admitted shortly afterward.

Chairman Powell also knows where the specific inflation problem lies. As a Republican in good standing, he shares his party’s bias in favor of limiting wage growth. At the Fed’s December meeting, the chairman pointed accusingly at the upward trend in labor income that was frustrating the Fed’s goal of 2% annual inflation by presumably stimulating consumer spending. In this, he was joined by other conservative Fed officials.

Letting slip a seldom acknowledged capitalist secret, Powell then elaborated that employers, if pressured to pay higher wages and benefits, would pass those labor costs on in the form of higher (read: inflationary) prices. Inconveniently for the chairman, this observation flew in the face of an International Monetary Fund (IMF) finding (as reported in The Economist, 10/22/22) that wage growth, now and historically, has not kept up with inflation, negating perennial fears of wage-price spirals. Instead, the IMF calculated, roughly half of annual inflation for 2021 was due to disruptions in production and higher commodity prices, with government stimulus spending a distant second.

At one fell swoop, the IMF thereby decimated the two most hoary right-wing beliefs about what causes inflation: (1) the Fed’s rising-wages bugaboo (shared by Wall Street) and (2) the Republican Party’s specter of runaway federal spending. In the process, it also undermined the GOP’s proposed anti-inflation program outlined in the 2022 midterm campaign: cutting taxes and shrinking government.

Ironically, the Fed’s own data supports the IMF conclusions on wage inflation. Reporting by the New York Times last April, based on Fed statistics, indicated median wages for various categories of American workers increased in 2021 at a rate of just 3% to 7%, no higher than median wage increases prevailing from the 1980s to the economic downturn of 2007-09. Two-thirds of those wage increases, furthermore, failed to keep up with overall inflation itself.

As for the inflationary effects of federal pandemic spending, a favorite target of anti-government Republicans, they have largely disappeared as a factor. The Trump stimulus of April 2020 that mostly helped business through the Paycheck Protection Program (PPP) is long gone, and the Biden stimulus of March 2021 has also largely expired; the American Rescue Plan’s briefly expanded unemployment benefits and child tax credits ended in September of 2021.

What, then, is the source of persistent inflation? Basically, it’s capitalism operating as it usually does, given the opportunity. Business is continuing to raise prices because, in an era of lax regulation, it can. Cal-Berkeley historian Christopher W. Shaw, whose April 2020 article in Harper’s revealed the Fed’s feet of clay regarding monetary policy, enumerated existing alternatives to using recessionary interest-rate hikes to control inflation: taxes, price controls, wage guidelines, voluntary reductions in consumption — to which could be added antitrust actions. All, regrettably, are out of favor in modern America.

So, for example, we’re presented with such developments as US food prices rising 13% over the 12 months ending November 2022, according to the Bureau of Labor Statistics. Such price boosts naturally translate into profits, which rose for America’s corporate sector as a whole by a record 35% in 2021, with profit margins at their widest since 1950. One iconic US firm, Coca-Cola, reported profits up 14% last October compared to October 2021, a surge it unashamedly credited to its price increases.

The rationale for these extravagant returns is invariably explained as the complex structural nature of the companies’ far-flung trading markets. Oil and grain prices, in particular, are said to be ungovernable, quite beyond the understanding of outsiders. Domestic shortages and price volatility are an unavoidable result of the workings of sensitive arcane market mechanisms; they must be tolerated. In actuality, US corporations could easily satisfy the needs of their domestic markets without “supply-chain disruptions” and profiteering; they prefer instead to market their wares wherever and however they can get top dollar.

Worldwide commodity-production statistics for the years 2017-19 supplied by The Economist magazine’s “Pocket World in Figures, 2021” shed light on the true situation. US output rankings in critical commodities were as follows: second in miscellaneous grains, second in cereals, second in meat, third in vegetables, third in cotton, first in oil and natural gas, second in total industrial/manufacturing output, and third in total agricultural output.

So what’s the real inflationary problem? Could it be monopoly?

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, February 1, 2023

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