Inflation: The Supply-Side Perspective
Although I’m several hundred miles from New York, I could have sworn that I heard a chorus of “Happy Days are here again” Coming from the direction of Wall Street. Yesterday morning, just after the announcement, that Inflation came in at a mere 7.1% for November, the lowest level in 11 months.
You see, there’s a belief on Wall Street that the financial community can solve all of our country’s ills. And a clear indication, at least to the Street, that they had slain the inflation dragon. Is runaway Inflation a plague across the land? Fear not; the mighty financial knights will banish that beast into outer darkness.
As it turns out, the Federal Reserve endorses this way of thinking. And right about now, Chairman of the Fed, Jerome Powell, is riding mighty high. Going into today’s announcement of the Fed’s latest decision on interest rates, Powell can bask in the full glory of a lowered CPI.
As one wag said yesterday, “put a fork in inflation, and it’s done.”
It’s such a remarkable accomplishment that it’s worth re-telling how we got where we are today — having solved one of the most significant challenges in our economy and having done all this in less than a year.
Our story began on January 20, 2021, when Joe Biden was sworn in as the 46th President of the United States. On that day, Inflation stood at a mere 1/4% for the month, or an annual rate of under 1 1/2%. And for those of us who still drive those antiquated fossil fuel vehicles, the price of gasoline that month was $2.39 per gallon.
As the Biden family partied away on that crisp January day, no one even considered the possibility that in another year, Inflation, something the nation hadn’t experienced in over 40 years, Inflation would begin to rear its ugly head.
But by March of 2022, Inflation was well underway to become the nation’s number one economic issue. And just like in the 1970s, the last time the country experienced runaway inflation, energy ignited the higher prices.
Back then, the OPEC Oil Embargo set us down the path to higher Inflation. Today, a President vowed to transition the country from fossil fuels. Preferring renewable energy sources, such as wind, solar and hydro, President Biden actively canceled oil leases on Federal Land and blocked oil pipelines (the Keystone XL Pipeline). And in a move that achieved two objectives, cutting off Russian oil and gas imports while reducing the nation’s overall supplies of fossil fuels. Biden announced that the country would no longer purchase Russian fossil fuels.
As you may have guessed, cutting the oil supply, especially gasoline, doubled the price. From $2.32 per gallon on inauguration day to $5.00 per gallon the following June.
And as night followed day, as the price of gasoline rose, it drove Inflation higher and higher. By March of this year, monthly Inflation exceeds 1%. Multiply that by 12, and you can see that we were experiencing double-digit annual Inflation. We hit that level of Inflation again in June of this year. Fortunately, the other months did not see the same rise in gas prices, so Inflation, at least until now, has topped out at just over 9%.
Still, that’s far from the 1 1/2% inflation that we were experiencing when Joe Biden took office.
If you’re like me, that’s a pretty straightforward recounting of what we’ve been through these last 18 months. A steady reduction in all forms of energy, especially gasoline, leads to an overall price increase, which drives overall Inflation.
But this is because you and I live in a world of goods and services and actual supply and demand issues based on reality.
That’s not at all the world of Washington or New York. Our political and economic leaders see what happened as the triumph of financial restructuring.
You may have forgotten that fateful day, May 31, 2022, when President Biden called Fed Chairman Jerome Powell into the Oval Office. The meeting was to discuss “the historic inflation that was draining American wallets.”
Odd. The country had an inflation problem that was “draining American wallets.” The chief cause of the problem was the price of energy, yet Biden called upon the nation’s top banker.
Of course, Biden did this because he would pass the football to Powell. In one deft move, the problem of Inflation, and the energy policies that led up to it, were passed onto the Federal Reserve. Biden washed his hands of the entire affair. From now on, the Fed and Fed alone would be tasked with solving the inflation problem.
In Biden’s clever turn of phrase, he respected the “independence of the Federal Reserve.” (unquote) And the Fed’s ability to become the fall guy.
Whether from arrogance or intimidation, Powell accepted the challenge. And from that point forward, it was no longer Biden’s energy policies that caused Inflation. It was now Fed monetary policies that would need to control Inflation.
So far, so good. Today, Inflation has indeed subsided. Wall Street is undoubtedly happy. It is seen as the triumph of finance.
Everything should be fine, at least until another gasoline shortage.
Econ Briefs
Well, the big day is here. In a few hours, we will get the latest Interest rate decision by the US Federal Reserve Board. Watching the Wall Street Analysts pencil in lower and lower rate estimates is fascinating. Conventional thinking is that the Fed will raise rates by 50 basis points. However, I have seen estimates as low as zero.
I’ll still hold to that 50 basis point rate hike when the Fed announces its decision today at 2 pm eastern time.
Meanwhile, the inflation doves just received another indication that global inflation is slowing, as India and Great Britain reported that inflation in their countries for November was much lower than expected.
For those who like to dig deep into the weeds, pay special attention to the Fed’s long-range projection on inflation. That’s inflation beyond 3 or 4 years. Let’s see if they change their current estimate: that long-range inflation will be at 2 1/2%. If they hold to that level, it likely means that the Fed also sees that we are past the peak level in inflation.
In earnings today, positive results from Delta Airline and specialty vehicle maker Rev Group, not-so-positive results from cloud support company Arqit Quantum, and flat results from Weber Incorporated. It’s just too cold to think about grilling outdoors!
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