Sticker Shock
A quick recap of recent U.S. inflation and what the public policy responses might be.
It’s Sunday, July 25th.
The Wonk is a weekly policy newsletter that delivers the headlines you may have missed, and long-form analysis on an issue that matters. If you enjoy the Wonk, consider forwarding to a friend!
Headlines You May Have Missed
Biden’s Budget Blow
Okay so not the most graceful alliteration but regardless, President Biden’s military budget was dealt a relatively significant blow this week when the Senate Armed Services Committee voted to increase the military budget by approximately $25 billion. The decision to override the President wasn’t quite as significant as the fact that all but one Democrat (Elizabeth Warren - MA) voted in-favor of the increase. This nearly unanimous vote likely signals that the Senate has little appetite for curbing defense spending (even on the margins) and should set the table on this issue for several budget cycles to come.
Continued Energy
Reports of U.S. intelligence and defense officials getting “Havana Syndrome” have grown in the last number of weeks. “Havana Syndrome” is the selected terminology used to describe U.S. officials working abroad who report sudden and often prolonged bouts of dizziness, blurred vision, headaches and more when out in public. The intelligence community’s working hypothesis is that these symptoms are caused by long-range “directed energy” attacks from a foreign country or actor (likely Russia). What’s particularly concerning are that officials don’t know:
Do these weapons actually exist?
If they do exist, how big are they, what is there range, what symptoms do they cause and for how long?
Who is carrying-out the attacks and to what end?
These unresolved questions are unlikely to have immediate or certain answers but look for this issue to remain topical for a long-time to come.
How Much?!
Ahh inflation, that sneaky little concept that your “friend” who you can barely tolerate never fails to mention when you try to share your optimism about saving some cash for a new car, a nice vacation, or the ever elusive (or not so elusive) utopia that I think they call retirement.
Inflation is like so many things in life, almost totally harmless in moderation and absolutely devastating if it gets out of hand. For some examples of what happens when inflation (i.e, the same monetary unit losing a small percentage of its value over time) gets out of hand, just look to Germany post WWI or Venezuela’s economic crisis which is currently unraveling (prices are up more than 2,000% in the last year).
Thankfully in the U.S., we aren’t in the same neighborhood as those international & historical examples. However, given the strong economic growth conditions of the past few months as COVID (hopefully) continues to wane, rising inflation is becoming an increasingly popular topic of conversation.
Below, let’s try to get a grasp of exactly the “flavor” of inflation the U.S. is facing and the likely policy responses from Congress, the President, and of course The Federal Reserve.
Survey says…
Prices are up .9% in June and 5.4% over the trailing twelve month period. The survey we are using to get those numbers is none other than the Consumer Price Index (CPI for short).
The CPI is the gold-standard for assessing inflation in the U.S. The survey tracks prices with a sample of more than 6,000 households and 22,000 stores over a ~relatively~ comprehensive set of goods and service categories that make up the American economy.
To put the two numbers (.9% and 5.4%) in context they are the highest levels of inflation that the CPI has recorded since the months coming out of the 2008 financial crisis. If the U.S. economy were to end 2021 with inflation at or above 5% that would put us far ahead of the Federal Reserve’s 2% inflation target (yes, too little inflation can be bad as well).
To understand exactly why inflation is ramping up there are two approaches.
Get a PhD in economics from Stanford completing 135 credit units over 4-5 years in beautiful Palo Alto, California.
List a number of ~likely~ reasons for heightened inflation, acknowledging that even those very same Stanford economists are never exactly sure which underlying reasons are driving the bulk of inflationary trends.
Given that you probably have 5 minutes and not 5 years, let’s get to listing!
Supply chains: Heavily constrained global supply chains given the contractions from COVID place a real burden on production levels (hence limiting supply and driving up prices).
Chip shortages: This is related to supply chains but is a bit more specific. Tech companies and especially car companies are facing a serious shortage of semiconductor chips which are needed to manufacture a host of products.
Shrinkflation: This is a tricky one. When companies are facing higher raw material prices they are generally forced to make one of two choices. 1) Pass those higher prices along to consumers or 2) shrink the size of packaging (i.e., your 20 oz. salsa gets a haircut to 17 oz.) which decreases a company’s costs but allows them to keep their consumer-facing unit price unchanged.
Fiscal policy: The government has been spending cash like there is a hole in its pair of federal cargo shorts. Well over 2 trillion dollars in federal COVID assistance is very possibly contributing to a hot economy and subsequently to higher prices.
Monetary policy: This is all on the Federal Reserve (the U.S. central bank who controls all monetary policy decisions). The Fed has kept interest rates incredibly low (near 0) during the entire pandemic and is also purchasing a high volume of bonds. Both of these decisions are tied to the Fed’s desire to stimulate economic growth, but likely have an adverse effect of fueling higher prices.
Where we are headed
In-short, really smart people with degrees in economics generally think that higher inflation will be temporary.
As supply chains begin to accelerate, chip shortages hopefully wane, the federal government reels in COVID-related spending, and the Fed potentially moderates its stance on interest rates / asset purchases, consumers should expect to see prices come back to earth.
However, that entire explanation is certainly more theory than practice. If some of those “likely events” don’t materialize or even if they do but there are other more powerful forces which continue to drive inflation, there could be a serious impacts on both the U.S. & global economies.
Keep an eye out for that golden CPI data to track the trends and for leaders at the Fed, in Congress, and in the White House to take a variety of approaches in the coming months to balance strong economic growth with reasonable inflation.
Wonk Wrap
What you could read
The furthest thing from public policy but this 10 minute piece in the Globe Magazine is the reflections of a man who has lived a full life but is now only months away from death. It’s heavy but some truly beautiful writing.
What you could think about
330 Russian athletes are headed to Tokyo for Olympic competition, exactly 0 of them are competing for Russia. Because of a state-sponsored performance enhancing drug program, the International Olympic Committee (IOC) banned the country of Russia from official competition through 2022. Instead, the 300 Russian athletes are competing for the “Russian Olympic Committee” without the symbol of the Russian flag or the Russian national anthem after winning gold medals.
With Gratitude,
- Sam