Consumer Prices Explode 7.5% Higher, Worst Inflation in 40 Years
U.S. consumer prices jumped by the most in nearly four decades as the new year started, sapping the savings of American families, diminishing the purchasing power of worker paychecks, and putting pressure on the Federal Reserve to hike interest rates beginning in March.
The consumer price index climbed 0.6 percent from a month before, the Department of Labor said Thursday. Compared with January of last year, consumer prices are up 7.5 percent.
Economists had expected prices to rise 0.4 percent on a monthly basis and 7.2 percent above a year ago’s prices.
In December, consumer prices rose 0.6 percent compared with November. For the full year, prices were up seven percent in 2021, the worst annual inflation since 1982.
Excluding the volatile food and energy components, so-called core prices rose by 0.6 percent. The measure soared six percent from a year earlier. Both exceeded economist estimates.
Although many economists and anti-Trump journalists claimed President Donald Trump’s tariffs would raise prices, consumer prices remained low throughout his administration. Trump’s tariffs turned out not to be taxes on consumers. Instead, they were absorbed by Chinese producers and exporters and the profit margins of most large U.S. companies.
Inflation only began to accelerate last March after years of coming in below the Fed’s two percent target. The Fed had decided to keep interest rates low although the economy was recovering at a faster than expected rate. What’s more, the Biden administration pushed through billions of dollars of deficit spending in the American Rescue Plan. These combined to fuel demand for goods and services faster than supplies could expand, pushing up prices.
Federal Reserve chief Jerome Powell, following the advice of many of the economists on the central bank’s staff, initially claimed that inflation was due to transitory factors. Fed officials forecast that inflation would fall in the latter half of 2021, predicting that supply chains would swiftly unsnarl and a rebalancing of consumer demand from goods to services would relieve pricing pressure. The Biden administration, under the tutelage of former Fed chair and now Treasury Secretary Janet Yellen, largely followed suit and continued to press for even more spending.
Establishment media largely parrotted these views, portraying the surge in inflation as a temporary shift higher due to the reopening of the economy. Many establishment outlets described fears of longer-lasting inflation as the product of partisan fear-monger and claimed they had no rational basis. Some of the same outlets that had claimed, without evidence, that Trump’s tariffs were raising prices now insisted price increases under Biden were no big deal. Some said that a silver lining of inflation would be higher wages. In fact, prices have been rising faster than wages, lowering the standard of living for many American families, and the hardest hit have been lower-income Americans.
That unanimity in government and establishment media proved calamitous. Inflation continued to soar, sapping the credibility of the Biden administration and the central bank when it came to inflation. Late last year, Fed officials dropped the word “transitory” from their vocabulary and began signaling that they would raise interest rates this year. Resistance from centrist Democrat Joe Manchin (D-WV) to spending more while the economy was suffering from decades-high inflation killed the Biden administration’s push for a so-called “human infrastructure” spending bill that its advocates had touted as the signature legislation of President Joe Biden and the greatest expansion of government since FDR’s New Deal and LBJ’s Great Society.
The public’s perception of President Biden’s competence has collapsed. Many Americans interpreted the administration’s confidence that inflation would pass to be a sign that it did not care about the hardships inflicted upon families paying more for gasoline, groceries, and Christmas gifts. Attempts by the administration to blame corporate greed for high prices fell flat. Although the Biden administration announced the biggest ever release of oil from the government’s emergency reserve–a norm-defying dip into an asset normally held tightly and used only for events like natural disasters or wars–oil and gasoline prices have continued to rise to the highest level in years.
Polls show the public’s rating of Biden’s handling of the economy is at a record low. Biden’s overall approval rating has plummeted. Forty-five percent of Americans say inflation has put a strain on household finances.
The Federal Reserve is expected to raise its target interest rate in March, months earlier than market watchers thought last year. Swaps prices prior to the release of consumer prices on Thursday implied about a twenty-five percent chance that the Fed will raise its target by two notches, a half a percentage point, at the March meeting, breaking the recent pattern of raising the target by just one-quarter of a percentage point at each meeting. After the release, the odds of a half-point hike jumped to 44 percent. Fed watchers are also debating how many times the Fed will hike rates, with swaps prices now implying at least three and perhaps four hikes this year. Many analysts, however, increasingly think the Fed will hike five to seven times this year as inflation proves less tractable than officials believed.
The bad inflation numbers are even worse than the government says
You couldn’t miss the headlines: The annual percentage increase in inflation clocked in at 7.5%, making it the worst increase in 40 years. For anyone on a fixed income, living off of savings, or in a low-paying job, this is a disaster. Rich people don’t feel it (much) but ordinary people do. But here’s the kicker: Inflation is almost certainly worse than it was 40 and more years ago. Moreover, because the government is in thrall to Modern Monetary Theory, it’s going to get worse, lots worse. And all the while, China is sitting there, watching and waiting.
Inflation destroys wealth. People’s salaries never keep up with the inflation rate and the elderly aren’t earning more money so their savings can only lose purchasing power. It also hits the poorest people the hardest, making it completely regressive. That’s why a news report like this one strikes terror in the heart of both citizens and the political party in charge:
A relentless surge in U.S. inflation reached another four-decade high last month, accelerating to a 7.5% annual rate as strong consumer demand collided with pandemic-related supply disruptions.
The Labor Department on Thursday said the consumer-price index—which measures what consumers pay for goods and services—in January reached its highest level since February 1982, when compared with the same month a year ago. That put inflation above December’s 7% annual rate and well above the 1.8% annual rate for inflation in 2019 ahead of the pandemic.
The so-called core price index, which excludes the often volatile categories of food and energy, climbed 6% in January from a year earlier. That was a sharper rise than December’s 5.5% increase and the highest rate in nearly 40 years.
That “40-year” number, though, is misleading. Certainly, inflation has shot up with incredible speed, as happened in 1982, but real inflation is probably even worse than the accelerated rate suggests. That’s because, in 1990, the government changed how it calculated inflation (something it also did in 1980). John Williams’s Shadow Government Statistics calculates inflation as it would have been calculated before 1980 and before 1990. According to his numbers, inflation would have been over 15% using pre-1980 metrics and over 10% using pre-1990 metrics.
You don’t need the numbers, though, to tell you what you already know. It’s getting increasingly hard to afford life’s necessities.
Image: Hundred dollar bills by jannoon028. Freepik license.
Moreover, it’s going to get worse because there’s no indication that the government intends to stop printing money. It’s currently in thrall to “Modern Monetary Theory” (“MMT”).
MMT, beloved of leftists like Bernie and AOC, holds that a government with fiat money—that is, money that has value only because the government gives it value (e.g., paper money as opposed to gold coins)—can print money indefinitely because it makes up the value as it goes along. In other words, money really does grow on trees in the world of MMT.
But of course, that’s nonsense. Ultimately, fiat money must represent the actual wealth of a nation. As I used to tell my kids, a candy bar is always just a candy bar, whether it’s priced at 5 cents in pre-inflation money or $5 in post-inflation money. The only real thing in that equation is the candy bar. But once you start printing money like crazy, so that there are so many dollars floating around that the candy bar is priced at $5,000, while the candy bar hasn’t changed, you’ve bankrupted everyone in the country.
Employers aren’t part of printing money. And savings accounts definitely aren’t in on that government printing press. While the government goes on a spending spree, everyone else lags behind. Speculators and cronies may get rich but the economy eventually falls apart.
That’s what the Biden administration—helped along by a bipartisan Congress drunk on spending—is driving us to: The collapse of our financial system.
And all the while, China is watching us like a hawk—China, the country that holds an enormous amount of our debt and much of our manufacturing. China would like the yuan to become the world’s reserve currency, the one everyone relies upon because of its stability. If the government will not stop printing money, people around the world will start to view dollars like the Italian lira in the 1980s or the Reichshmark in the 1920s; that is, worthless. China then steps in and the dollar truly collapses.
And when the dollar collapses, America is cooked. The resulting Depression will make the 1930s look like a party.
If you want to save America from that fate, you must tell your congresscritter to vote “no” on any future spending bills. In the primaries, you need to vote for the candidate who swears on his own life that he will cut spending, and then you need to vote again for that candidate in November. Otherwise, we’re not traveling down a dangerous road; we’re in free fall off the sheer face of a high cliff.
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