Inflation is becoming a self-fulfilling prophecy

 

Wolf Richter, author of the Wolf Street Web site, has put up a short podcast describing how "temporary" or "transient" inflation is becoming entrenched in our expectations.  This is a serious problem, because what people expect affects how they behave and the choices they make.  Some of us have seen this coming for a long time (witness our discussions on the subject in these pages), but others have been "on the fence" about it.  As more and more people wake up to what's going on, the "herd instinct" may take over as the prime mover behind continued and increasing inflation.

Note that Mr. Richter speaks of "5% inflation" and "8% inflation rate" as if they were gospel truth.  That's not true, of course.  He's citing the official figures released by the Bureau of Labor Statistics and the Federal Reserve.  As we've already noted, those figures are woefully - even criminally - inadequate, due to deliberate policy choices and biases in how they're very selectively calculated.  My rule of thumb is to multiply the "official" figure by 3.5 to obtain a more realistic measurement.  Using that approach, Mr. Wolf's numbers become more like 17.5% and 28%.

(If that sounds high to you, go to the supermarket, check current prices, and compare them to what you paid for the same items a year ago.  You'll find my extemporized rate calculations are pretty much spot on.  The just-announced official Consumer Price Index rate of 5.4% for June 2021 would thus, according to my rule-of-thumb measurement, translate to a true inflation rate of 18.9%.  My wallet and our shopping history tell me that's a pretty accurate reflection of current, real-world inflation.)

Here's Mr. Wolf.  I encourage you to spend ten minutes listening to his presentation.  If you're interested in the economy, it's well worth your time.

A few other points that are contributing to higher inflation rates include (but are not limited to):

• Spending on credit, rather than paying cash, makes it easier to disregard higher prices.  "… the convenience of noncash payment has its bad side. It has already made saving harder and spending easier. The dematerialization of money feels good in our daily lives, but it may have long-term consequences we’ve only begun to face … Dozens of studies have shown that consumers using credit cards rather than cash are less likely to remember how much they spent, take less time deciding what to buy, are more willing to pay high prices and make a greater number of purchases. They also exert less self-control, buying more junk food, luxury goods and other impulsive items."
• Supply chain woes are snarling more and more companies producing "backbone" goods, needed by all other sectors of the economy.  Recently, a leading U.S. maker of stainless steel was forced to declare force majeure (i.e. break contracts with customers) at its Kentucky mill because it can’t get enough of the industrial gases it needs.  How many items are made using (or containing) stainless steel?  An awful lot.  If the supply is limited, demand for what's available will bid up prices - and that'll ripple all the way down the supply chain to consumers.
• "Shrinkflation" (selling less product for the same price as previous larger quantities) is becoming endemic.  Mouseprint monitors this and alerts consumers to new cases.  It makes interesting - and disturbing - reading.

Those are just a few examples out of many I could have cited.  A one-person web site or blog like this can't possibly keep pace with all of the developments in the field.  Suffice it to say that things are not getting better - rather, they're rolling faster downhill than ever.  I can only urge you to take steps to minimize your exposure to the many risks we face.

Peter