Yesterday I explained that consumer-price inflation is not showing any signs of tapering off. On the contrary: it is showing signs of already being entrenched in the U.S. economy. Unlike the nonsense that some economists put out there about inflation being good for the economy, the fact of the matter is that inflation above the two-percent that is consistent with advances in the standard of living is always bad.* The higher inflation gets, the worse it is for the economy.
I also noted that inflation today is way above where it was two years ago, when the economy was operating at the peak of its capacity. Today, only 58.8 percent of the workforce-age population is employed, compared to 61 percent at this time in 2019. The difference does not sound like much, but it is: if we had been at 61 percent employment rate in September this year, another 5,651,000 Americans would have been working today.
This is like getting the entire workforce of Ohio off tax-paid benefits and into paying taxes.
Unfortunately, we are not going to see that happen any time soon. Inflation gradually erodes the confidence that businesses need in order to invest and create new jobs. It also weakens household confidence in the future, with rising costs of daily living prohibiting families from taking on new mortgages, car loans or other debt. This in turn weakens consumption of, among other things, consumer durables, the production of which has significant multiplier effects throughout the economy.
One of the strongest signs that inflation is entrenching itself is the persistent trend of rapid increases in producer prices. In September, the Producer Price Index for commodities (not industries, which does not have an all-covering component) was up 20.4 percent over September last year. It was the sixth month in a row with 15+ percent PPI inflation.
It was also the first month since December 1974 that producer prices have risen at more than 20 percent in a month. In fairness, last year was anomalous due to government forcing a shutdown of large swaths of the economy. There are two other ways, however, to show just how high inflation is in producer prices, the first of which compares PPI to CPI. For the past eight months, producer prices have outpaced consumer prices by a factor of 3.9 to 1: for every one percent that consumer prices have increased, producer prices have gone up 3.9 percent.
This parity is steady and shows no signs of tapering off, which means that producer prices will work their way into consumer prices going forward. The other way to gauge the resiliency of inflation confirms point. We calculate price increases from year to date, i.e., how much prices had gone up in September compared to the start of the year. This measure, which has the advantage of eliminating distortionary effects from last year’s artificial economic shutdown, puts 2021 in grim historic light:
- Of all the 99 years on record, from 1913 to date, 2021 is the fourth most inflationary;
- Only 1917 (21.0 percent), 1946 (16.3) and 1933 (16.2) were worse, and 1974 is right behind with 14.1 percent.
Things look a tad better on the consumer inflation side, with 2021 having the 16th highest year-to-date inflation. However, it is ominous to see what years rank higher:
Raw data: Bureau of Labor Statistics
Four of the five years of the 1970s stagflation episode had higher inflation year-to-date than we do.
To make this outlook even more frightening: the producer price inflation that accompanied CPI inflation back then did not even peak until 1979 – and it was lower back then. Figure 1 reports year-to-date PPI for 1977-1980 and for 2021:
In short: this is not over yet. Not by a long short.
Next up: a comparison of inflation and unemployment for 2021 and for the stagflation era. Stay tuned!
*) The two-percent inflation rate consistent with advancements in the standard of living is derived from an adaptation of Okun’s Law to consumer spending. I explain this adaptation in my book Industrial Poverty.