Inflation's Causes are Many, Complex

It is easy to blame it on the Russians yet, the reasons are more complex.

When people talk about inflation, they look at the current cost-of-living indicator (CPI) , currently 5.8% for March 2022 (year over year), yet the prices they pay also include the “legacy inflation” from prior years.

Using 2017 as a benchmark, since it reflects a period prior to COVID and the war in Ukraine, I found that the inflation during these five years increased by 14.7% to 16.9%. Since this inflation rate is still with us, we might call it legacy inflation.

Adding 16.9 % legacy to the current 5.8% tells us that we are currently living with a total inflation of 22.7% (no surprise here). This means that we are living in a time where the inflation of all goods will increase by 0.5 % per month.

This is still less than the just announced Producer-Price-Index which is increasing at a rate of 1% per month. Unfortunately, this high CPI might be a foreboding of what might come as future inflation.

Analyzing the reasons for such high inflation, I found three major causes:

First, high food prices, here the primary cause was doubling of wheat prices, due to the absence of Ukrainian wheat, which filters through to bread, cereals and other baked goods. Other factors affecting food prices are high diesel cost for farmer’s tractors and fuel for truckers bringing the food to market. Any future lowering of oil prices will have a beneficial effect on the cost of food.

The second major component is gasoline prices. This will not be reduced unless our government allows oil imports from Venezuela and Iran in order to make up for the missing Russian oil.

The third cause is insufficient U.S. production of manufactured goods to satisfy demand. Thankfully, our unemployment rate is close to zero.

The problem is that only 8% of our national workforce works in manufacturing (it used to be 14% 15 years ago.) This lack of manufactured goods forces us to import items from Asia in order to fill the void. Such imports greatly increase our trade imbalance which in turn increases our national debt burden.

Also keep in mind import prices always match the current U.S. inflated cost per item; therefore, they do not reduce inflation.

As I mentioned in my last blog, the Fed is raising interest rates, which supposedly is intended to fight inflation. That will not work.

No, the real reason for increasing the yield on U.S. bonds it is to ensure that those yields more closely match the rate of inflation; otherwise, nobody would buy government bonds.

That certainly would be a disaster.

All above data from U.S. Bureau of Labor Statistics.