By the measure most Americans recognise, inflation is running at an annual rate of 5.4 per cent, the highest in 13 years. There are other indicators, and consumers who don’t eat, or drive a car, or worse yet, plan to buy a new one or a house or rent a flat, will be less hard hit by rising prices than others. But even the Federal Reserve Board’s preferred measure, up 4 per cent, is almost double its target, and had the board’s chairman, Jay Powell, confessing surprise. Raising interest rates, however, is “not something that is on our radar screen”. Tapering $120 billion (£85 billion) of monthly asset purchases definitely is.
Home prices in the middle of the national price range were 24 per cent higher in June than a year earlier. Airline fares are up 12 per cent in the past three months. Steel and tin are at all-time highs. Prices of Oreo cookies, Goldfish crackers, Folgers coffee, pasta, canned tomatoes and other foods have jumped.
“Consumers understand,” says General Mills’s (Betty Crocker, Cheerios, Häagen-Dazs) chief executive, Jeff Harmening. Besides, shoppers might not notice hidden rises from fewer discounts and ingenious price-pack architecture — changing package sizes to conceal higher per-ounce prices. Ask not for whom the cash register tolls, it tolls for thee, and most loudly for the least able to pay.
Yes, the size of martinis in New York has shrivelled, and increases in prices of favoured Starbucks infusions may have forced more frequent refills of the over $1 billion in preloaded digital accounts the affluent make available to the company interest free. More consequential is the 9-12 per cent increase in the price of disposable nappies since the end of 2019, forcing many families to rely on nappy banks, which report a 68 per cent increase in distributions. And yes, wages are also rising, with callow lawyers and bankers starting at $200,000 and $100,000 a year, respectively. But for many Americans, inflation-adjusted earnings are down, even after accounting for wage increases.
President Biden, hampered by the absence of his usual supply of cue cards, said these increases are “temporary”. That was quickly corrected in a White House press release, and rebutted by Powell, who labelled the price explosion “transitory”, not “temporary”. He explained last week that he did not expect that producers “are going to take these prices back”, only that the “process of inflation” would be transitory. Once that transition period ends, the “process”, guided by the Fed, is expected to produce mere 2 per cent annual increases over time, according to Fed officials famous for a long series of forecasting errors, which suggests a need for a new model.
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But rising wages and costly perks are now embedded in the economy. Walmart, the people’s purveyor, and McDonald’s, caterer to the masses who now face 6 per cent higher menu prices, are offering higher pay and generous benefits, including reimbursement of college tuition and costs to attract staff. Private sector capitalism is turning its attention to its survival by creating opportunities for increased economic and social mobility. Those benefits are unlikely to prove transitory.
Nor is it likely that broken links in supply chains will be replaced overnight. Chip factories take years to build, and workers capable of making high-quality chips take more years to train. Ports incapable of handling the volumes of goods needed to meet demands cannot be expanded quickly. New mines for many metals, often opposed by green groups, will take years to be permitted and become operational.
While the supply side struggles, the demand side will continue to press hard on it. Trillions in relief funds have resulted in abnormally high savings rates that are making their appearance in the form of pent-up demand for goods and services. Consumers have added to their ability to spend by paying credit card balances down 10 per cent from 2019 levels. Retailers are stocked up for the first visit in almost two years by parents expected to break records equipping their little darlings with high-fashion knapsacks and older ones with dorm-room paraphernalia, stuff needed for in-school learning, or at least attendance.
The “transitory” group is confident that, should the current inflation rate persist, chairman Powell will know what to do. Except that he might not be in that seat. The Massachusetts senator Elizabeth Warren, influential with the president, dissented when the Senate committee approved Powell’s nomination 22-1. She is unhappy with him because of what she regards as his relaxation of banking regulations.
Democrats on the left would prefer a minority, or a woman, or even better, a minority woman. Graham Steele, nominated by Joe Biden to be the Treasury’s assistant secretary for financial institutions, has said: “It would be a huge missed opportunity to reappoint a conservative white male as Fed chair.” Steele will be among those making up Biden’s mind on Powell, who bears the additional cross of having been appointed by Donald Trump.
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Irwin Stelzer is a business adviser
