People are talking about inflation as if it’s the 1970s. I keep checking to see if wide neckties or leisure suits are back in fashion, but neither inflation nor orange polyester jumpsuits are menacing our nation right now.
We’re not going back to the future. Inflation is higher than it has been in many years as prices for gasoline, used cars and other items rise at their fastest rates since the early 1990s. However, the causes of higher inflation today are different than 40 to 50 years ago, and we risk choking off a healthy economy by using the 1970s as a guide to economic policy.
What is inflation?
Inflation is an increase in the general level of prices across wide sectors of the economy. It is not a rise in the price of a particular good or service such as bread or dry cleaning. Knowing that the price of bread rose, for instance, doesn’t tell us much. Did it rise faster than the price of milk? More slowly? We need a standard against which we can measure price changes of individual items.
That’s where a price index, such as the Consumer Price Index (CPI), comes in handy for two reasons. First, the CPI measures the general (average) level of prices for goods and services that a typical household purchases each month and thus can be used to measure inflation. Second, the CPI gives a benchmark against which we can compare changes in the price of individual items (such as a loaf of bread) with prices more generally.
The Bureau of Labor Statistics (BLS) compiles the CPI monthly using information on 211 goods and services collected in 38 geographic areas. This allows the BLS to calculate CPIs for a variety of time periods, combinations of goods and services, and different community sizes.
Back to the ’70s?
Inflation in the 1970s was higher than today, accelerated over the decade and had a traumatic effect on economic policy. Starting from about 2 percent in the late 1960s, inflation rose to 12 percent in 1974 and 14.5 percent in 1980.
The underlying causes were, in retrospect, clear. First, we were hit with two oil shocks. The price per barrel of oil quadrupled during the 1973 oil embargo and then doubled again in 1979 as a result of the Iranian Revolution. Second, the Federal Reserve did not have a mandate to raise interest rates and slow down the economy to stop inflation from rising until President Carter appointed Paul Volcker as Federal Reserve chair in 1979.
Neither of these problems exist today. We have not experienced any price shocks of the magnitude of the oil price increases of the 1970s nor do any seem to be on the horizon. The Federal Reserve is committed to keeping the long-run inflation rate at 2 percent and Jerome Powell (or his successor as chair) and his colleagues will do whatever it takes to rein in inflation should it appear to be accelerating. Right now, there’s no sign of this happening.
Inflation today
In the U.S. today we see great variation in inflation rates and price increases (and decreases) across places and commodities, and, unlike the 1970s, there is not a broad-based pattern of all prices rising rapidly in all areas of the country.
Geographic variation:
The inflation rate for the US, as measured by the CPI between October 2020 and October 2021, was 6.2 percent. When we zero in on the Midwest (as defined by the Census Bureau), prices rose by 6.6 percent, with prices rising 5.8 percent in cities of 2.5 million or more (e.g. the Minneapolis-St. Paul area) and 7.1 percent in smaller areas.
These patterns hold for other areas as well: inflation was higher in smaller communities than in larger ones and lower the closer you live to one of the coasts. This suggests that increasing transportation costs, driven primarily by the rapid rise in gasoline prices and other petroleum products (caused primarily by the freaky freeze in the south in February 2021), are driving inflation rates as opposed to excessive demand on the part of consumers and businesses.
Product price variation:
Price changes varied considerably across different types of goods and services as well. For example, food prices rose 5.4 percent, with the price of white bread rising just 1.3 percent while beef increased a whopping 20 percent. Unleaded regular gasoline rose 51 percent, but electricity fell by 0.1 percent. “Recorded music and music subscriptions” decreased in price by 1.6 percent and smartphones fell 21 percent.
This is important because every family will feel inflation differently. A household that consumes a lot of beef, uses a lot of gasoline, and buys a lot of hard liquor (up 4 percent) will experience a higher inflation rate than one that buys chicken, drives a hybrid car, and drinks wine (up 0.4 percent).
Broad based inflation?
These data suggest that inflation is not being driven by broad factors but by causes that are hitting individual markets. Put another way, inflation is not higher because everything is getting more expensive but rather because prices in particular sectors of the economy are rising rapidly while other sectors are showing steady or falling prices. This shows up as an increase in the general CPI but it’s being driven by problems in individual market segments such as the supply-chain issues that wholesalers and retailers are dealing with today.
In brief, some sectors of the economy are seeing rising prices, which is driving up the CPI, but the rest of the economy is experiencing relatively stable prices with increases in the range of 2 to 4 percent per year. System-wide inflation is not occurring.
Reconversion: a better lesson from history
A better historical analogy than the 1970s for today’s inflation problem is the reconversion of the U.S. economy from wartime to peacetime production after World War II and the Korean War. For instance, civilian automobile production ended in early 1942 and didn’t resume until late 1945. It took time to reconvert factories from making aircraft engines to automobile engines.
Similarly, the pandemic caused entire sectors of the U.S. economy to shut down for weeks or months, then restart under pandemic conditions of social distancing, remote work and other changes in production practices. All this change takes time, and it will show up in competitive markets as higher prices. Parts and labor shortages cause prices and wages to rise, and that’s exactly how markets are supposed to work. The higher prices provide signals to businesses and households about what goods and services to produce, which industries are attractive to work in, and more generally how resources should be deployed throughout the economy. Prices will settle down as each market is able to resume its regular patterns.
There is a strong temptation, especially among politicians, to demand that President Biden, Congress, or someone do something to stop this rise in inflation. That’s the wrong way to think about our situation. Instead, we need to let markets work out the bugs of supply-chain issues, higher-than-usual fuel prices and other idiosyncrasies of today’s pandemic and post-pandemic economy.
And have no fear, we’re unlikely to see rainbow socks with platform shoes in the near future.
I thank Susan Riley for extensive help with this column.
Dream on. Inflation now and in the past is and was caused by massive deficit spending. Printing money to pay for increased spending instead of raising taxes. We have been doing this on steroids, not just during Covid, but in the decade before that. The chickens are coming home to roost.
What evidence do you have that the Fed will do the right thing? Right now, they and everyone is in denial. If they start increasing interest rates, it would be a catastrophe for the federal budget. This won’t happen until we get back to double digit mortgage rates.
Fasten your seat belts.
Maybe $18 an hour to flip burgers leads to higher burger prices.
Maybe an industrial policy that allowed our worldwide lead in chip production to vaporize leads to a shortage of chips and the ability to manufacture devices that need them, like cars and causes supply and demand increases to new car prices.
Maybe the shortage of new cars creates a supply and demand situation with used cars.
Meanwhile China sits back and decides that their industrial policy needs to encourage domination in chips, batteries and solar panels to name a few, while we solve our problems by shouting “Go Brandon!” at public events.
Infrastructure spending and BBB spending is our most significant step in answering China’s progress and plans. The lasting legacy of Trump is:
“All of the autocracy and none of the results”
Watch out… the GOP spin doctors will twist the inflation/price increases against the Biden administration when they should be looking back at when private bone spurs tried to ignore the impending covid crisis which is responsible for today’s public challenges.
Good to know that the almost $9 trillion injected into the economy by Federal Reserve and congressional actions caused no inflation !
Dude, it was not “injected” into the economy, it was already there. The Treasury borrowed it, at very low interest rates, from people and institutions that had funds available to purchase to Treasury securities.
But what I really want to know is, were you bothered by the red ink that resulted from the 2017 GOP Tax Give Away to Billionaires and Huge Profitable Corporations Act? Or is it just a problem when the government helps waitresses and school kitchen staff?
How wonderful it is,to have a sane, clear, knowledgeable voice explain our current economic situation to us! Welcome back, Professor Johnston, and thanks for the specificity without political spin in this explanation of why we are NOT in the 1970s. Of why our current inflation blip will pass, and varies by sector, anyway.
You mean to tell me printing money left and right doesn’t devalue the dollar, who knew??? Why worry about inflation then? Let’s look at the similarities between 70’s and 2021, gas prices are exploding, heating your house costs more, we are totally dependent on Mid East oil, have a President with a 36% approval rating, Saigon fell/Kabul fell. Feels a lot like 1070’s to me.
Gas prices are up over a year ago but significantly lower than they were in 2008 $4.10 or $5.16 or you include the effects of inflation). We are the largest producer of oil in the world, not the Middle East, but we’re also not part of an oligopoly so we decide when and how much oil to produce. Blame Texas for increased heating costs—a part of the increase is due to power companies needing to recoup sky high cots during the freeze last winter. Worried about inflation because of deficits? Where was inflation when the last administration racked up trillions in deficits?
The Federal Reserve has been printing $100-120 billion a month since Fall 2019, before the pandemic started, to keep the big banks afloat and I assume, to buy out corporate debt and for big private equity investors to take out massive loans at 1% to buy up the wreckage of the Covid economy. Now ask yourself why that $3trillion of made up money never gets mentioned in the media, in relation to inflation?
Does my 19.1% property tax increase get measured? Does the near 100% increased cost of used cars count? What about Health Care? How about the 50% increase in heating my house? See what your house cost in 1970, and then run it through a CPI calculator, and then compare that to the actual cost of your house.
Yeah, the inflation numbers in America are like most of the numbers in America, what the people who run America want us to believe, not a reflection of reality.
Yes, the increased cost of used vehicles is factored into the CPI. In fact, it is distorting the CPI at the moment. Pull the rise in new and used vehicle prices out of the formula, and the inflation rate is much lower.
The cost of gas has almost doubled. Much of this because the Biden administration has shut down the XL pipeline and oil production on government land. Then he’s been begging Putin and OPEC to sell us oil. We used to be an exporter of oil, now we are back to importing some from unfriendly countries.
Everything gets shipped by truck. To a grocery store, to an Amazon distribution center, to Target and Home Depot. All the ingredients and raw materials get shipped by truck to where it’s made.
Lots of this inflation can be attributed to Biden’s decision. All the talk over the last five years about who is Putin’s buddy and now our president is doing him a big favor.
Lordy, Lord! I wish some of you Republicans would actually read this article, and others, that carefully and with solid figures contradict your canned sound bites. Biden is not the Devil–try as you may to portray him as that! He’s so good and calm a President, after The Ludicrous Previous Occupant and Loser of the White House, that Republicans make fools of themselves trying to make Biden responsible for everything they think people don’t like.
Biden a ‘calm’ president? He can’t even answer an unscripted question. And on the rare occasion he does, he offends somebody, but the media ignores it. The continued government spending is driving prices higher. Anybody who keeps promoting deficit spending is dooming the future generations of our country (republican or democrat). Inflation is a huge problem. To say its ok is delusional. But there doesn’t seem to be any shortage of delusion today.
Constance, this latest inflation spike has the Biden’s administration fingerprint all over it. You want oil, gas and heating costs to skyrocket, close down Keystone pipeline and stop oil/gas on Federal land. Done and done. You want inflation to cripple middle and lower class folks, make sure you spend more to feed your family, make it cost more to heat your home, make cost more to fill your gas tank, make it cost more to clothe your family, print more dollars so your dollars are worth less. Done, done, done, done and done.
Has absolutely nothing to do with anything but the Biden Administration’s policies…. Period!
Hilarious. Is inflation in the rest of the world Biden’s fault too?
It’s a clever plot, cooked up to make it look like inflation is the US is not President Biden’s fault.
Keep up, Pat.
Well the world wide pandemic was trumps fault
I would suppose that, in the fullness of things, there are people who hold that opini0n. It’s a popular attempt at snark by the right wing, which means it need have no basis in reality. The capacity of the public for delusion is never-ending (or did JFK Jr. really show up at Dealey Plaza?).
What Trump is more accurately blamed for is the criminally inept US response to the pandemic. Recall that his gut reaction was that the whole thing was being exaggerated to make him look bad. What if we had had a President who wasn’t an ignorant megalomaniac exhibiting symptoms of paranoia?
Pat, most of the world does not have oil/gas resources like the USA, they are dependent on OPEC by need, we are by choice. Most countries cannot grow their own food due to lack of growing season, acreage limitations and water, we do not. Most countries do not have manufacturing centers to build anything they need, we do, but choose to have China make it for us. The list of reasons USA is different from 95% of countries is too long to go into.
We do not need to be like Germany, Argentina or Japan….. That is the point, we don’t need to endlessly print money for a million different Federal programs, don’t need foreign oil, don’t need foreign manufacturing, don’t need foreign wood products, don’t need foreign precious metals. We are not like Vietnam, why act like we are? The issues we are having are from our own makings and Biden’s policies.
“Biden administration has shut down the XL pipeline and oil production on government land”
All of which is untrue supporting Constance’s point.
“Biden Promised To End New Drilling On Federal Land, But Approvals Are Up”
https://www.npr.org/2021/07/13/1015581092/biden-promised-to-end-new-drilling-on-federal-land-but-approvals-are-up
AND
Phase 4 of the Keystone XL pipeline would, at present, have ZERO impact on our petroleum prices because it would not be completed at this time. We need an explanation of how a “theoretical pipeline” reduces current prices.
The lasting legacy of Trump to his followers is that facts are meaningless: if lies and deception support a position, full steam ahead…
There’s an article at NYT about a bunch of whiners complaining about the price of gas. The story highlights a couple of these dimwits, one in front of his Jeep, can’t tell if its a Rubicon or not, but regardless, that thing gets maybe 14mpg in the city, the other guy is in front of his very late model Escalade, again, a rig that maybe, with a stiff tail wind gets 15mpg – and yet they are to stupid to realize the shortcoming of their cars, and blame the price of a gallon of gas for their woes. Can’t make that up.
Oh, and gas is not twice what it was last year, that’s just a lie.
How exactly does preventing Canada from selling oil to China raise gas prices here again?
It’s a world market
Less.supply higher-prices
Yes it’s a world market, but what’s being described is a closed sale. China is still getting the oil, from Canada, by different means. Had China needed to switch to a different supplier, you might have a point, but they did not. The only effect of the pipeline closure is some pipeline workers losing an opportunity (bad for them, to be sure, but not a catastrophe of global proportion), and the Chinese paying the Canadians a marginally higher rate for their dirty oil. None of which would be turned into American gasoline (or Chinese gas, given its poor quality) in any case. The situation is nothing more than a poorly researched talking point, like most of the “issues” of the right.
The doubling of gas prices has nothing to do with the XL pipeline. That was to carry really dirty, sulfurous tar sands oil. That stuff is really expensive to transport and refine and wasn’t destined for your car.
And the bad news is, those price increases aren’t going to drop back to their previous levels once the government’s inflation figure drops back to an “acceptable” level. When the government declares inflation to be over, those new higher prices will be the new normal.
Dennis, inflation is a “rate”, not a static number. So you realize that even if an inflation rate is zero… the current prices remain… that just economics math, not government duplicity. And you may want to look up the different between inflation and deflation, controlling inflation doesn’t require deflation. And yes… over the years prices always go up…. back the 70’s during the oil crises I paid $1.20 for gas in the middle of a 14% inflation rate. If you really want to crash the economy, hit it with a 10% deflation rate.
Missed his point.
We are stuck with higher prices even after inflation slows. Erodes savings, hurts old folks on fixed income, and workers until.and if wages catch up.
I think you missed the point Greg, prices always rise over time. Haven’t you heard about the 35 cent hamburgers people used to eat in the 1950s? I used to pay 85 cents a gallon for gas in the 1970s. Yeah… inflation is a real thing no matter what party controls the White House… what’s your point?
In some other comment threads around here we’ve discussed the obtuse nature of these Republican mentalities, but I think it is important to remember that a lot of Democrats bought into this deficit delusion back in the 80’s and 90’s.
If it weren’t the damage and suffering all of this stupidity has caused from climate change to vaccines these would be comical anecdotes, but these guys NEVER get tired of being wrong and when people like that wield real political power the death and suffering they inflict isn’t funny.
The toxic irony of so many dunderheads presuming to be the brightest economist in the room can comical from a narrow perspective because they actually work sooo much harder to maintain their delusions that the rest of us do when we simply watch the news.
So just the for the heck of it, let’s ask these guys to explain why it is that inflation rates stabilized and decreased when Reagan, Bush, and Trump, doubled the deficits? Why is it deficits didn’t matter during the Reagan/Bush presidency but now all of the sudden we can ignore a worldwide pandemic and decide that deficits and only deficits can cause inflation?
I appreciate Mr. Johnston’s article here, but really, it could be much more succinct if he simply observed the fact that this inflation is almost entirely the product of pandemic supply chain crises, that’s really all you to say.
The irony is that those who have prolonged and magnified the pandemic economic crises are precisely the very same people who claimed to be trying to save the economy by resisting efforts to contain transmission and distribute vaccines. All these people who demanded “open” businesses, events, and family gatherings magnified transmission, created super spreader events, and bred new variants. They’re refusal to wear masks and get vaccinated prolonged and promoted ongoing transmission so in the end, their efforts to “save” the economy actually caused more damage and prolonged the supply chain crises to the point it’s causing this inflation. And now these people want to blame the government for the economic damage they’ve inflicted.
Is this price we pay for tolerating so much ignorance and anti-intellectual/anti-science “activism”? It the price we pay for our debate game culture that pretends no matter how ignorant or obtuse a person is, they’re entitle to “argue” about everything?
Seriously, this garbage has actually been killing people, not just during the pandemic.
Has there ever been a time where (mostly) willful ignorance (along with a lack of empathy) been so damaging?
Oh boy! Has the quality of economics teaching at St Johns ever deteriorated.
Fr Martin (or Milton Friedman) would grade your paper with a lot of red ink.
The on-going rise in oil prices has little to do with a storm in the Southern US.
It has everything to do with the current administrations shutting down of the
domestic oil and gas industry.
Oil prices were low for over a year due to oversupply relative to demand, interstates were relatively empty.
Chicago School economics was always libertarian fantasy pretending to be analysis. Fortunately Mr. Johnston has moved on to more reality and data based analysis. These latest bizarre claims that Biden has someone shut down domestic oil and natural gas production are just recent examples of residual Chicago School/Republican intellectual failure.
These guys don’t seem to be able to decide which false claim to go with… is it the deficit or the non-existent halt in domestic oil and gas production that’s driving inflation? I guess they’ll go with both… doubling down on false claims has become a common feature among these guys eh?
The problem we have to deal with is the extent to economics based on fantasy, dishonesty, and delusion, still influence policy.
It has literally nothing to do with that. Martin and Friedman would give you comment an F.
This administration didn’t shut down the domestic energy industry. The pandemic and lack of demand did. For a lot of reasons—mostly to do with earning some sort of profit—drillers aren’t returning to pre-pandemic drilling (the number of rigs are still down). As far as I know there aren’t any new government regulations prohibiting drilling.
With Covid there was always the danger of deflation. Trust the expertise you would much rather have inflation with growth than deflation and a depression.
If people are really worried about inflation then they should be in favor of higher taxes, especially on wealthy Americans. Pull that money out of circulation.
Electricity went up 6.5% from Oct 20- Oct 21, not -0.1% according to the link you provided. -0.1% was just from Sep.2021-Oct.2021.
So is this article supposed to make us feel better about the spike in inflation that has occurred this year? It seems just sugarcoating a bad thing. I would think almost all families would say it sucks as it affects almost every household. Never mind just bread and used cars, it’s everything. When you add to it that the cost of energy is going through the roof and with winter just starting, people are going to be outraged because it’s a burden. And you only have to look at the Biden policies on energy for that.
Oh for Pete’s sake Bob, it’s just a lie to say “everything” is going up in price.
Well, of course as responsible adults we have an obligation to consider facts and information even that doesn’t make us feel “good”. Our emotional reactions to information don’t dictate the rationale for providing information right?
Beyond that, yeah… the fact some prices will likely come back down once the pandemic damaged supply chain recovers doesn’t make me feel “bad”. I suppose if stories about the crippling effects of inflation make other people feel “better”, well you do you.
This is one of those scenarios wherein supply and demand actually functions and provides some predictability.
It’s kind of funny in some ways, for the first time in decades we’re actually having to talk about inflation, and some people want to catastrophize it. It just goes to show how Americans in some ways have been living in an economic bubble regarding inflation for so long.
This article and 90% of the comments are the Democratic narrative. Inflation is ok, maybe its even good. We don’t need all those things anyway. Higher gas prices are good.
Depends on context. In the frame of climate, yes, higher gas prices are absolutely good. If one is a climate change denier, probably not. Higher prices in conjuction with a hike in wages and reduction in wealth inequality, good. Higher prices from the wealthy exploiting a pandemic created economic imbalance (the root cause of many of the supply chain issues), not so much.
Matt, what an unusual summation. You do know you can have rising wages and low gas prices, don’t you? You can have rising wages and not have food prices skyrocketing. It is not an either/or situation.
Inflation hurts the middle and lower classes much more. This nonsense that inflation is a good sign (pushed by Democrats) boggles the mind!
Good to know you’ve eschewed conservative economic theory. Well, more likely you never understood the worldview you promoted, but hey it’s a start.
Robert, inflation, viruses, climate change, education, etc. etc. are NOT political phenomena. What you’re seeing here isn’t liberal perspectives, it’s just responsible people discussing reality. The only people trying to pretend that economics and inflation are partisan issues are Republicans like yourself. I for instance am not Democrat, therefore I am not representing Democrats, I’m simply making basic economic observations. The idea that politics dictates reality is actually an extremist perspective typically promoted by dictatorial mentalities.
Can someone tell me why the Biden Administration constantly asks OPEC and Russia to produce more oil so gas prices go down (unfortunately they tell us to pound sand)? Why not produce more here? They haven’t figured out the USA has more oil and gas than either Mid East or Russia?
Probably for the same reason Trump kept asking OPEC for the same thing. Are you COMPLETELY unaware of the various Saudi-Trump shenanigans?
I’d love to see what the Professor has to say today. Supply and demand is as constant as death and taxes. You inject TRILLIONS of dollars into an economy and you have too many dollars chasing too few goods. The idea that this is a SUPPLY CHAIN problem is an attempt to deflect blame. Spending needs to stop and interest rates need to rise. This necessarily will be painful. Politicians need to know that the interest on national debt is a consequence of overspending. That debt is now $30 Trillion. 10% interest on that debt is $3 Trillion. Add a few more Trillion for increases in entitlements and you have a very simple recipe for an economic meltdown. It baffles me how ANYONE can deny the math, unless of course you’re blinded by a political agenda which is what’s happening here.