Inflation cost households an extra $10K

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Inflation is over, the administration crows, even as Congress works to pass another massive spending bill — this time, $1.7 trillion.

But struggling families know not to pop the cork yet.

The consumer price index rose just 0.1% last month, bringing the 12-month rate to 7.1% — still higher than any year since the disco days of 1981. Politicians have downplayed inflation ever since President Biden ignored economist warnings in early 2021 that it would be economic malpractice to throw a $1.9 trillion stimulus bill at a supply-constrained economy. Then we were told that inflation was “transitory,” a relic of corporate price gouging and “Putin’s price hike.”

The Federal Reserve has also downplayed inflation. Two years ago, its Federal Open Market Committee (FOMC) forecast that inflation (using a slightly different measure called the PCE, for Personal Consumption Expenditures) would be 1.8% in 2021. It instead came in at 5.8%. Not learning its lesson, the FOMC projected that inflation in 2022 would fall to 2.6%. It is now set to end the year at 5.6%. So here we are again, with the FOMC projecting inflation rates of 3.1%, 2.5%, and 2.1% over the next three years.

This is higher than any year since the disco days of 1981.
The consumer price index rose just 0.1% last month, bringing the 12-month rate to 7.1%.
REUTERS

Losing credibility

Repeatedly downplaying the threat of inflation has reduced the credibility of the White House, the Federal Reserve and other forecasters.

Even as the Federal Reserve aggressively plays catch-up on interest rates, one or two positive months mean little to wary consumers — especially when paired with the same old promises that supply chains will open up, government spending will slow, and shifts in demand from goods to services will dampen price pressures.

Consumers have several reasons to worry that inflation may remain sticky. Large Federal Reserve interest rate hikes have not yet broken inflation. As of this past summer, household savings remained $1.7 trillion above the baseline (mostly due to excess government stimulus payments), ready to drive up consumer demand. Supply chains have been slow to open, and Russia’s war in Ukraine can still wreak havoc on energy and food prices.

Most self-defeating of all, President Biden and Congress have that massive year-end spending bill. This is in addition to the student loan payment moratorium (and possible student loan forgiveness), and a plethora of expensive new Biden administration regulations, tariffs and mandates specifically designed to raise consumer prices and federal-government costs.

And of course, the more Washington drives up inflation with spending and regulations, the harder the Federal Reserve will have to slam the economy’s brake pedal with higher interest rates, likely killing jobs and inducing a recession.

The economy is set to have grown just 0.5% this year.
The Federal Reserve, led by Chairman Jerome Powell, projects an anemic 0.5% growth next year.
REUTERS

Anemic growth

This leads to phase two of inflation’s economic hardship. Inflation is likely to eventually be suffocated by the Federal Reserve through escalating interest rates, fewer jobs and lower economic growth that will linger long afterward. The economy is set to have grown just 0.5% this year and the Federal Reserve projects an anemic 0.5% growth next year before settling in at a weak 1.8%. A recession is quite possible.

Nor is the Federal Reserve likely to let interest rates fall back to pre-pandemic levels. After defeating the 1970s inflation, the Federal Reserve and nervous financial markets maintained higher-than-typical interest rates for the next 15 years. This means the honeymoon of 3% or 4% mortgage rates is over. Car loans and business loans will also remain more expensive indefinitely.

These elevated interest rates will also devastate a federal government that is already drowning in debt. Each percentage point increase in the interest rate that Washington pays on the national debt brings $2.4 trillion in additional interest costs over the decade, and $30 trillion over 30 years.

Over the long term, that is like adding another Defense Department each time that rates rise. The era of free lunch economics is over in Washington, and paying these interest costs will eventually cost you in steeper taxes and less government spending.

Consumer at grocery store
Since President Biden took office, the cumulative 13.8% inflation is roughly 10% higher than the baseline rate.
Levine-Roberts/Sipa USA

$10K household woe

Finally, even normalizing the inflation rate does not cancel the price hikes of the past two years. Since President Biden took office, the cumulative 13.8% inflation is roughly 10% higher than the baseline rate. This has cost the typical household approximately $10,000 over two years.

Those household costs will continue rising even if the inflation rate normalizes. That is because this recent extra 10% inflation will remain embedded in prices moving forward. Inflation rates may return to 2% or 3%, but they will be applied to a permanently elevated price level. And with wage growth notably slower than price growth over the past two years — producing the steepest decline in real wages in decades — most families will remain behind.

In the meantime, families are heading into a holiday season with one-year price surges of 10.6% for food, 13.1% for energy (including gasoline) and 14.2% for transportation services. The new inflation report is welcome news, but it’s a small battle in a painful, extended war.

Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on twitter @Brian_Riedl

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