Inflation, a Brake on the Recovery

September 19, 2021 Updated: September 26, 2021


Last week, Ned Davis Research published a note titled “Turns out growth looks like it was transitory—inflation more sticky.”

There are many factors that show us that consumers and salaries are being eaten away by inflation, leading to an abrupt halt in the recovery. Autos and new home sales plunged, real disposable personal income has plummeted, and real median wage growth is lower than inflation.

Policymakers have pushed inflation at any cost with the most aggressive monetary policy in decades, and it took a normal recovery after the reopening to prove why inflation is always a monetary phenomenon: In 2020, G-7 central banks increased money supply well above demand and faster than ever since 2009. This led to massive inflation spikes in essential goods and services. The rhetoric of “transitory” inflation and “supply chain disruptions” has been rapidly debunked. We’ve seen three consumer price index (CPI) prints after the so-called base effect ended and prices continued to rise. Furthermore, the price of commodities where there’s overcapacity has risen as fast as others.

Inflation is always more money chasing scarce assets, and that’s why we see shipping or aluminum rise to all-time highs when there’s ample capacity in the segment, even excessive capacity.

Monetary history shows that policymakers always resort to the same excuses when it comes to printing money and monetary mismanagement: First, say there’s no inflation; second, say it’s transitory; third, blame businesses; fourth, blame consumers for overspending; and finally present themselves as the “solution” with price controls, which ultimately devastates the economy.

In the United States, median wage growth has been more than offset by inflation, and in the eurozone, wage growth plummeted in July. In fact, the risk in the eurozone is higher, as average hourly wages fell in year-on-year terms in the second quarter.

Consumers see the prices of the goods and services they buy every day rise significantly faster than the official CPI shows, and this, in turn, derails the economic recovery that was supposed to come from a less-than-likely consumption boom and services boost to above-trend growth in 2021. None of those Keynesian miracles happened.

As policymakers continue to implement massive financial repression measures, the problem is likely to get worse into winter. No government or central bank seems willing to reduce the speed of fiscal or monetary imbalances, because they benefit from rising inflation. Does anyone believe there will be strong policies to reduce inflation from the same central banks that have pushed trillions into the economy to attract inflation and for the same governments that would benefit from inflation to dissolve a bit of their rising debt?

We are now in the step where governments blame businesses. President Joe Biden blamed rising gas prices on “profiteering,” and one of his main economic advisers at the National Economic Council, Brian Deese, said pork, chicken, and beef prices rose faster than normal because four companies control the supply.

In Spain, the government blamed electricity producers for a rise in power prices that came from higher CO2 costs—a tax from which European governments will collect around 20 billion euros in 2021—thus, the government was effectively profiting from the rise in CO2 prices and, at the same time, blaming businesses for it. This was also part of the heated debate in Germany. Power prices soared due to high natural gas and CO2 prices, and political parties blamed speculation and power companies.

This is what will likely intensify into the third quarter: governments blaming businesses for causing the inflation that policymakers have fueled, then presenting themselves as the solution and imposing price controls, destroying the business fabric, particularly for small enterprises.

Keynesian policies always destroy what they pretend to protect. In this case, the middle classes, real wages, and small businesses are being wiped out by the inflation tax and the increase in other taxes, as governments reap the benefit of inflationary policies, increasing the size of the public sector on the way in, deficits and quantitative easing, and on the way out, inflation and taxes.

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

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”