Inflation Becomes Self Perpetuating
The Bureau of Labor Statistics (BLS) released consumer price data on Tuesday, September 13. Again it surprised economists and investors by continuing to run very high. Readers here are not surprised. Our posts show continued expectations for high inflation. Expect it may run high fur another 2-3 years. Maybe not 8-10% high, but quite possibly. Once inflation jumps as it did recently, inflation becomes self perpetuating. Be prepared with a copy of Winning Mortgage, Winning Home from Amazon.
Why does inflation continue to run high when everyone wants it lower? Many factors go into it, especially in 2022. First, Biden continues to attack and curtail fossil fuels in favor of electric vehicles, windmills, solar and fairy dust. So called green energy makes up only a tiny fraction of US power needs. Unless the economy and life reverts to the 1850s or earlier, fossil fuels will be required for the next century regardless of how many windmills and solar panels get built. Electricity prices have already soared 25% from a year ago in the US and between 600% and 1200% in Europe. The costs to businesses have yet to be fully factored into consumer prices.
While the reported US inflation rate to consumers was reported at 8.3% for August, it has been running well over 10% for businesses. Expect those costs to continue to move to consumers. Here are some of the top cities for consumer inflation as of August 2022 as listed by the BLS.
Food Prices
Food prices continue to outpace general inflation. The ingredients to produce food for the US and the world have spiked. Fertilizer costs up 300% and constrained by how much can be produced. Couple this with efforts to take land and fertilizers out of production, and consumers have not yet begun to feel food price inflation. Sri Lanka took fertilizers out to become “green.” The resulting crop failures, diminished production, and skyrocketing prices toppled the government. Sri Lanka went from exporting food to starvation. The Netherlands has embarked on a similar trajectory, planning to take about one quarter of land out of production. Expect the same results. Great Britain has proposed similar measures. Expect the same results.
Energy makes up a great deal of food prices. Fertilizer requires energy to produce and to transport. Tractors, reapers, farm machinery all require energy, which has more than doubled in price. Harvesting, processing, transporting food to consumers also requires energy. Not all those costs have been passed through. They only get passed on after harvests. So these costs increases are delayed, but will eventually hit consumers. This is only one part of why inflation becomes self perpetuating.
Wage Increases and Strikes
Once the inflation genie is out of the bottle and consumers pay more, consumers want wages to keep up. Of course. After 40 years of taming inflation though, Biden has released the inflation genie by vast overspending by the government, attacking energy, a rampant Fed spewing money, and attacking businesses in the name of DEI. That spending, bureaucratic authoritarianism has only started. In will run for another 3 years at a minimum. Currently, union strikes are in process or planned around the world. These strikes want higher wages, which will lead to higher inflation – self-perpetuating. Who can blame them or anyone looking for help from Biden’s inflation pain?
However, strikes have a secondary effect. The threatened rail strike in the US would disrupt the ability to even obtain many staples, food, and goods. This leads to those who can afford it bidding up prices even more. Those without means suffer shortages of have to change habits or borrow. Borrowing for groceries has soared in 2022 as have the estimated 20-40 million people behind on energy bills.
Biden Panic on Energy
White House officials are growing increasingly alarmed about Europe’s energy crisis and Russian President Vladimir Putin’s threats to force a bleak winter on the continent.
Seeking to punish Russia for the invasion of Ukraine and force a retreat, Western allies have moved to set a cap on what buyers pay for Russian oil. Putin last week said Russia would retaliate by cutting off gas and oil shipments, which could devastate Europe’s economy, It would hurt the United States by sending global energy prices soaring and hurting Democrats in elections.
At the GasTech 2022 conference in Milan in September 2022, it was like none execs had ever seen. Those same “confident” energy ministry staff from Euro governments are privately in a full fledged panic trying to secure reliable supplies. One key problem is the lack of port delivery facilities for liquid gas product. Not quick to build—if ya ain’t got one now, won’t for 3-5 years.
In one meeting a Pakistani speaker almost started crying describing the economic dislocation skyrocketing prices are causing. He was in a meeting with the Uniper execs…and they are on the brink of shutting down absent massive cash infusion. Looked like hunted animals. Unless Vlad turns the spigot back on can’t see a happy ending. And major facilities like like aluminum smelters can’t flip “on/off”. Have to run continuously—$$ millions and months to deslag, clean and restart.
Europe’s energy crisis has left few businesses untouched, from steel and aluminum to cars, glass, ceramics, sugar and toilet-paper makers. Some industries, such as the energy-intensive metals sector, are shutting factories that analysts and executives say might never reopen, imperiling thousands of jobs.
More effects and reinforcing actions will be added here later.
Sources of Inflation
Inflation is always and everywhere a monetary phenomenon. It’s always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than in output. Moreover, in the modern era, the important next step is to recognize that today, governments control the quantity of money. So that as a result, inflation in the United States is made in Washington and nowhere else.
If you listen to people in Washington talk, they will tell you that inflation is produced by greedy businessmen or it’s produced by grasping unions or it’s produced by spendthrift consumers, or maybe, it’s those terrible Arab Sheikhs who are producing it. Now, of course, businessmen are greedy. Who of us isn’t? Trade unions are grasping. Who of us isn’t? And there’s no doubt that the consumer is a spendthrift. At least every man knows that about his wife.
But none of them produce inflation for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money.
-MILTON FRIEDMAN