The Federal Reserve and Biden administration are navigating a terribly challenging macroeconomic environment
. Even if labor markets cool
, inflation will remain volatile and continue running wild, owing to poorly conceived federal policies and significant inconsistencies between workers’ wage expectations and the value of what they can produce.
During the pandemic, many households experienced a surge in income thanks to stimulus payments, enhanced unemployment benefits, and assistance to privately-owned small businesses.
Notably, 68% of those receiving unemployment benefits had higher incomes than they did while previously employed.
Income exceeded value produced
With many folks not working and businesses closed, Americans received nominal aggregate income that exceeded the value of what they produced. Initially, inflation didn’t rocket, because households did not spend enough of that income and amassed about $2.5 trillion in extra savings.
Until January 2021, inflation remained low and even as headline inflation accelerated through the year, consumers failed to anticipate the historic price increases that they would endure in 2022.
All those savings and inflated personal incomes likely caused many individuals to feel richer than the economy could support them long term. And now as inflation outpaces nominal wages, workers are reluctant to let go of this false prosperity.
Unions are digging in, workers are organizing at Starbucks, Amazon and Trader Joe’s, and businesses continue to complain about worker shortages.
Rather stay home
Apparently, many folks would rather stay at home and run through savings than work for wages they consider inadequate. And that has depressed the adult labor-force participation rate.
Workers lucky enough to enjoy high demand for their services during the pandemic, such as in the technology sectors, got used to job hopping and setting their own terms—working not just from home but at long-distances that make even the occasional face-to-face meetings expensive.
That’s a recipe for a wage-price spiral and inflationary expectations the Fed can’t harness by raising interest rates FF00, -0.02% just a few percentage points. Even at current levels, real interest rates are still deep in negative territory.
With both businesses and households often able to borrow at rates still lower than current inflation, workers will be chasing their tails—demanding and getting higher wages—but with businesses raising prices even more.
Chairman Jerome Powell is now focused on “rational attention”—how a persistent pattern of inflation may cause households and businesses to build inflation into the spending and wage and pricing decisions.
Better to buy now than later
As consumers see a persistent, alarming pace of headline inflation, it becomes reasonable to pay prices for cars that pad manufacturers’ profits even as more vehicles become available this fall and winter. If households hold on to cash, they can expect to face even higher MSRPs later in 2023 and 2024.
Too much money will continue to chase too few goods for a long time.
On the supply side, White House oil and gas policies and green energy policies are a classic example of the right hand not knowing what the left hand is doing.
Biden is pulling out all the stops to encourage more green energy—windmills and solar panels—and to boost U.S. sourcing for the relevant equipment to foster greater energy security.
The Inflation Reduction Act of 2022 doubles down on those green policies and does provide for more leasing on federal lands for oil and gas development. However, to say it will fight inflation is false advertising EVs are already scarce, and further subsidizing purchases will boost demand and exacerbate shortages, increase dealer prices and add to the cauldron of inflationary pressures from workers’ outsize expectations.
Subsidies will raise prices
Similarly, extending pandemic era subsidies for the purchase of health insurance will encourage higher rates and for medical providers to push up prices as insurers may permit.
Biden’s policies have so far curtailed petroleum production and refining faster than EVs and heat pumps can come online to reduce demand for fossil fuels.
During World Wars I and II, the federal government famously rationed foodstuffs and during the second conflict, gasoline, shoes and other everyday items.
Through U.S. and European sanctions on Russia and Moscow’s capacity to dramatically reduce natural gas supplies in Europe and limit Ukrainian Black Sea exports of grain and oil seeds, the global economy is experiencing world-war scale supply chain disruptions for agricultural commodities, fertilizer, gasoline, heating fuels and petroleum feedstock for all manner of chemicals, plastics and everyday items.
Aside from a coordinated cutback in EU natural gas use, no one is suggesting wartime rationing to relieve price pressures. So, wartime shortages show up in staggering price increases and missing items at grocery stores and at the gas pump.
Consumer product companies are aggressively raising prices and willing to bear losses in market shares to lock in higher prices to support profits.
If all that constitutes a national policy to fight inflation, look for me to play shortstop Sunday for the Yankees!
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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