Can Inflation Be Tamed?

(Maxx-Studio/Shutterstock)

September Consumer Price Index (CPI) inflation results came in above expectations, at 8.2 percent, marking the seventh straight month of inflation above 8 percent. Gone is any talk from U.S. Treasury or Federal Reserve officials of inflation being “transitory.”

If there was any good news in the numbers, it was that energy commodities, such as gasoline and fuel oil, showed the third straight month of price declines from June highs. However, even with this relief, gas prices remain 18.2 percent above where they were a year ago, and fuel oil is up a whopping 58.1 percent.

On the other hand, the prices of food, shelter, and electricity continued to rise in September, threatening already stretched middle- and working-class families. Food at home is up 13 percent, electricity 15.5 percent, and the cost of utility gas has increased by a third in just 12 months.

While the pace of dollar debasement is accelerating, it is not new. According to the Bureau of Labor Statistics’s CPI inflation calculator, the dollar has lost more than 43 percent of its purchasing power in just over two decades. In other words, what a dollar bought in January 2000 would require $1.76 today. If inflation persists at 8 percent, it will take only two more years for the dollar to be worth (in purchasing power) merely half of what it was less than a quarter century ago.

We might be somewhat indifferent to this ongoing deterioration if wages were able to keep up with price inflation. Unfortunately, this is not the case. The BLS’s data confirm that real (i.e., inflation-adjusted) average weekly earnings have fallen by 3.8 percent over the past year. American workers are falling farther and farther behind.

What Could Be Done to Tame Inflation?

There are three tools available that could bring inflation to heel. The first is interest rates. A more aggressive interest-rate policy would take the air out of the “everything bubble” in financial assets, but it risks financial system instability worse than what occurred during the global financial crisis of 2008–09 and the risk of throwing the real economy into a severe depression. For this reason, the Fed, a supposedly independent central bank, having raised target rates by more than 3 percent so far this year, will nonetheless be forced to blink and make a “political” decision to reverse course, lowering rates once recessionary pressures mount or financial system instability starts to metastasize. In a preview of things to come in the United States, the Bank of England has already flip-flopped and “temporarily” gave up on plans for quantitative tightening when it looked like the entire U.K. financial sector might collapse as illiquidity in national pension funds threatened to spread.

The second tool would be to reduce the mountain of U.S. government debt, now a staggering $31 trillion. The only way this is possible, other than inflating it away, would be to impose monstrously high taxes or wealth confiscations of one form or another, which, like rising interest rates, would only serve to collapse the U.S. economy. As the largest debtor in the U.S. economy, the federal government benefits from high inflation as a means to reduce the real cost of servicing its debt. The incentives here all run in the wrong direction.

The third tool is fiscal policy. The U.S. government has run budget deficits every year since 2001, totaling $12.9 trillion over the period. Nearly half ($5.9 trillion) of this amount was accumulated in 2020 and 2021. Like interest rates and meaningful debt reduction, it’s nearly impossible to imagine the Biden administration and the U.S. Congress changing their spending habits or giving up on social programs intended to buy votes. Living beyond our means has now become a debilitating national affliction. The price will eventually have to be paid.

So, while in theory the tools exist to tame inflation, in practice, the political and economic costs are simply too high. What this implies is that despite all the talk from politicians on both sides of the aisle, no real or efficacious actions will be taken, and inflation will persist for years to come. Another potential implication, so long as labor markets remain as tight as they have been, is that organized labor, quietly neutered in the United States over the past half century, may find new purpose and strength in fighting to ensure that workers get their fair share of price increases in the form of wage and benefit increases. If these efforts become effective over time, they may offset at least some of the extreme income inequality that has characterized recent decades in a “winner take all” economy where capital has captured the vast proportion of value creation.

All said, Americans need to reorient and adjust both their spending and their stores of value to an environment of persistent inflation. In such a world, real assets such as commodities (including food, energy, and metals), houses and property, and anti-inflationary “hard money” tokens such as Bitcoin and Ether—so long as regulators don’t manage to suffocate the entire crypto industry—will almost certainly be better inflation hedges than financial assets such as bonds or holding cash over the medium term (at least three to five years).

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.