How Will 9.1% Inflation Hit California?

July 18, 2022 Updated: July 24, 2022

Commentary

In Sylvester Stallone’s “Rocky III” movie from 1982, an interviewer asks Clubber Lane, played by Mr. T, for a prediction of the fight. His one-word reply: “Pain.”

That’s how I remember the horrible 1970s inflation. And that’s what’s in store for California and the rest of America.

We just got the data for June. Inflation jumped 9.1 percent on a yearly basis. For just one month, May to June, it was 1.3 percent. And wholesale prices shot up by double digits, 11.3 percent. That last number usually translates into even higher consumer prices down the road.

In 1978-79 I was in California, as a U.S. Army soldier studying Russian at the Defense Language Institute in Monterey. From Michigan, I was a single guy, so the Army provided the basics. (Although I had to pay more for vacations and beer.)

But my friends in the local community were complaining about paying more for everything. Even existing homes cost more, as rising values led to higher property taxes. That led to the famous Proposition 13, passed June 1978, which limited property taxes and increases in the levies. Everybody I knew out here was in favor of it.

The inflation continued through 1979, when I was posted as a Russian linguist to a mobile intelligence unit in Hoechst, near Frankfurt. The Germans’ currency then was their own deutschemark, against which the dollar was declining in value, crimping every GI’s budget.

The sergeants with families in my unit especially were hurt and had to go on food stamps to survive.

President Jimmy Carter boasted how he was giving us GIs a 7 percent pay raise—as inflation hit 13 percent. In November 1980, voters dumped him for Ronald Reagan.

As bad as inflation is, there’s a second whammy: the Fed has to raise interest rates to avoid hyperinflation such as that in Germany in the 1920s or Venezuela today. Starting in 1979, Fed Chairman Paul Volcker sure did that, with interest rates rising to 20 percent for a while.

Today Fed Chairman Jerome Powell says he’s trying to avoid a recession. But the new 9.1 percent number shows that’s highly unlikely.

Yahoo finance headlined, “Bonds Slump as Inflation Surge Fuels Bets on 100-Basis-Point Fed Rate Hike.” That would be a 1 percentage point increase.

Every recession is different. The 2000-01 dot-com recession was relatively mild, shaking up the tech industry just before it took off to its current global domination. But it’s due for another shakeout. Which would slam Silicon Valley and the rest of California.

The 2007-09 Subprime Recession hit California especially hard because of over-investment in real estate. I knew folks from the Inland Empire who saw their home values drop 75 percent. They walked away from their mortgages. The federal reforms since then supposedly will prevent another real-estate collapse of that magnitude. Chapman University’s recent forecast expects a 15 percent drop in California, survivable for most.

But that’s just a prediction. And please don’t take any investment advice from a political reporter!

What’s also unknown is the recession’s effect on state and local budgets in California. The 1990-91, 2000-01, and 2007-9 recessions all caused massive state deficits, leading to tax increases. The increases ended the dreams of political advancement for the governors who signed them: Pete Wilson, who was re-elected in 1994, but whose presidential bid faded; Gray Davis, who was recalled; and Arnold Schwarzenegger, whose rumored U.S. Senate bid quickly was snuffed out.

What’s likely is the days of $100 billion-plus state budget surpluses are over. Following Gov. Jerry Brown’s lead, Gov. Gavin Newsom has made sure little of the surplus is baked into the budget process, which would mean the higher spending would continue even in bad times. The state’s budgetary reserve funds, another Brown bequest, also have risen to $37.2 billion. That’s according to the governor’s final California State Budget report for fiscal year 2022-23, which began on July 1.

That’s probably enough to push California through a year of even a really bad recession. But two years?

Finally, the likely accession of a Republican Congress this November bodes well for restoring economic growth. D.C. Beltway inmates hate “gridlock,” meaning divided government. But it also means conflict on spending. Which usually means little new spending. Which means less money flowing into the system, also easing inflation pressures.

When government has been controlled all by one party, spending has exploded. Examples include 2001-05 under Republican President Bush, 2009-10 under Democrat Barack Obama, 2017-18 even under Republican President Trump, and of course the wild spending under President Biden today.

By contrast, the last time the federal government ran a surplus was in the late 1990s when Democratic President Bill Clinton faced off against Republican House Speaker Newt Gingrich. They controlled spending and even gave us some tax cuts.

California’s high-tech industries, which are driving economic growth, are slowing, but aren’t going anywhere. Beijing or Moscow are not going to push aside Silicon Valley.

Finally, one thing that may happen is Californians could temper inflation by moving in even greater numbers to less expensive states. But ironically that will reduce housing prices by slackening demand, reducing inflation pressures for those of us who still want to avoid the Bad Weather States and keep enjoying the surf and sun.

Correction: A previous version of this article gave an incorrect title and year for the “Rocky” film in which the character Clubber Lane says his famous quote. The Epoch Times regrets the error.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

John Seiler
John Seiler is a veteran California opinion writer. He has written editorials for The Orange County Register for almost 30 years. He is a U.S. Army veteran and former press secretary for California state Sen. John Moorlach. He blogs at JohnSeiler.Substack.com