The Capital Letter

Inflation: Lobster Notices that the Water is Getting a Tad Hot

(Nerthuz/Getty Images)
The week of July 12, 2021: inflation, tax, and much, much more fun.

Moving on from last week’s doom fest (tax), it’s time to cheer things up with (checks notes) . . . inflation. Oh well.

The news hasn’t been, how to put this, great.

ABC (Tuesday):

Consumer prices continued to climb last month, newly-released data indicates, as the economy begins to bounce back from the pandemic-induced downturn.

The consumer price index, the Labor Department’s measure of what consumers pay for everyday goods and services, spiked 5.4% over the last 12 months. In June alone, it jumped 0.9%.

This was the largest one-month change since June 2008 and the largest 12-month increase since August 2008, the Labor Department said Tuesday.

The latest CPI data was largely driven up by the index for used cars and trucks, which skyrocketed by a whopping 10.5% in June amid a global chip shortage. This increase accounted for more than one-third of the increase for all items.

The so-called core index, which accounts for all items except the more volatile food and energy index, spiked 0.9% in June after rising 0.7% in May. The core index rose by some 4.5% over the last year — the largest 12-month increase since the period ending in Nov. 1991 . . .

There’s also the small matter of the producer price index.

CNBC (Wednesday):

Wholesale prices for June rose more than expected in another sign that inflation is moving at a faster pace than markets had anticipated.

The producer price index, which measures what companies get for the goods they produce, increased 1% from May and jumped 7.3% on a year-over-year basis. That marked the second month in a row in which the PPI set a record for a data series that goes back to 2010.

Economists surveyed by Dow Jones had been looking for a 0.6% monthly increase.


Stripping out volatile food, energy and trade prices, the core PPI increased 0.5%, in line with estimates.

Fed chairman Jay Powell on Wednesday (my emphasis added):

Inflation has increased notably and will likely remain elevated in coming months before moderating. Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation. In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind. Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.

And then on Thursday (via the Wall Street Journal):

“This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%. And of course we’re not comfortable with that,” Mr. Powell told the Senate Banking Committee on Thursday . . .

Earlier this year, Mr. Powell said he expected inflation would prove transitory because those one-time increases wouldn’t continue. But Mr. Powell said Thursday that even though the central bank still expects surging prices related to bottlenecks to reverse, the Fed was watching to see if other goods and services, where price growth has been flat or modest, might accelerate as the economy heats up.

“We’ve identified a half dozen things” that “look very much like temporary factors that will abate over time. What we don’t know is are there other things coming along to replace them?” said Mr. Powell. “We won’t have to wait a tremendously long time, I don’t think, to know whether our basic understanding of this is right.”

. . . “This particular inflation is just unique in history. We don’t have another example of the last time we reopened a $20 trillion economy with lots of fiscal and monetary support,” he said. “We are humble about what we understand.”

. . . Mr. Powell indicated the Fed was in no hurry to adjust its policies right now, but that it would have a better understanding of how the reopening was proceeding by year’s end . . .

“The challenge we’re confronting is how to react to this inflation, which is larger than we had expected—or that anybody had expected,” Mr. Powell said. “And to the extent it is temporary, it wouldn’t be appropriate to react to it. But to the extent it gets longer and longer, we’ll have to re-evaluate the risks.”

. . . Mr. Powell said the current level of inflation is well above the Fed’s goal. “This is not ‘moderately above 2%’ by any stretch . . .and we understand that,” he said.


I think we’re experiencing a big uptick in inflation. Bigger than many expected. Bigger than certainly, I expected.


Also on Thursday, Janet Yellen (my emphasis added):

“We will have several more months of rapid inflation,” Yellen told Sara Eisen during a “Closing Bell” interview. “So I’m not saying that this is a one-month phenomenon. But I think over the medium term, we’ll see inflation decline back toward normal levels. But, of course, we have to keep a careful eye on it.

Yellen’s is not the only suggestion from the administration that the narrative may be changing. As I noted earlier this week, there was this from the New York Times my emphasis added):

Administration officials have subtly shifted their views on how long the so-called transitory price effects will linger in the economy, according to two administration officials, even before this month’s report was released.

In Mr. Biden’s official budget request, released this spring, officials forecast an inflation rate that stayed near historical averages for 2021 and never rose past 2.3 percent per year over the course of a decade. But internally and publicly, administration officials have now begun to acknowledge the possibility that higher inflation could stay with the economy for a year or more.

A recent post from Mr. Biden’s Council of Economic Advisers, titled “Historical Parallels to Today’s Inflationary Episode,” concludes that the past period of inflation most comparable to today’s economy in the United States came immediately after World War II, when supply disruptions drove up prices. That period, the post notes, lasted about two years.

Or, if you prefer, JP Morgan’s Jamie Dimon (my emphasis added):

“The inflation could be worse than people think,” JPMorgan Chase CEO Jamie Dimon said on an earnings call Tuesday. “I think it’ll be a little bit worse than what the Fed thinks. I don’t think it’s only temporary.

The most transitory thing about that magic word “transitory” may be its definition — one that evolves from “a few months,” to “until the end of the year,” to “two years,” or, if you prefer, to “temporary” and then to “I don’t think it’s only temporary.”

“Temporary” itself, arguably, represents a deteriorating outlook when compared with “transitory.”

Axios’s Sam Ro:

Powell’s most recent written statement referencing inflation made no reference to “transitory.” He also never used the word during his lengthy Q&A with committee members.

The word “temporary” has come up, though.

“The problem with ‘transitory’ is that it suggested a very short period of elevated inflation,” SGH Macro Advisors economist Tim Duy wrote in a note to clients. “‘Temporary’ suggests the period of elevated inflation may be on the longer side.

None of this is to deny that much of the increase in prices can be attributed to the pandemic and its aftermath, from the effects of pent-up demand to messed-up supply chains. See, for example, the price of used vehicles (which accounted more than a third of the June month-on-month jump in the CPI even though used vehicles and new-car prices account for less than 4 percent of the CPI). The Economist explained what’s been going on:

Pent-up demand is being unleashed. Drivers have savings to spend, in part because of stimulus cheques from the government. Low interest rates mean that car loans are cheaper than ever.

The specific dynamics of the car-rental business have turbocharged price rises. When the pandemic began, travel stopped and almost no one wanted to hire a vehicle. With bills to pay, most car-hire firms were forced to sell their vehicles at fire-sale auctions. Now, with restrictions being eased, demand for hire cars has bounced back faster than expected. More commuters and holidaymakers may want to travel by car for fear of infection on planes and public transport. Carmakers have been unable to expand production fast enough to replenish rental fleets, owing to a worldwide shortage of semiconductors. Ford, America’s second-largest carmaker, recently said it expected to produce 1.1m fewer vehicles than planned this year—a fifth of its usual production—owing to the chip shortage. So the hire firms have been splashing their cash at used-car auctions, driving prices up as they compete for the limited vehicles available.

Used-car prices will not accelerate forever. Indeed, the Manheim index of wholesale prices dropped slightly between June and July. . . . That may be a sign of things to come. The supply of new cars will recover once the chip shortage has abated, easing demand for older ones. For now, though, the brakes are off.

Looking back past the pandemic effect can, in some instances, provide some comfort.

The Wall Street Journal:

The surge in travelers has boosted airline and hotel prices. Airfares in June were 24.6% higher than a year ago. Hotel prices were up 16.9% on the year. But prices for both items remain below where they were two years ago, in June 2019, before the start of the pandemic.


That suggests they still have room to rise in the months ahead before they reach their pre-pandemic levels.

But while there is plenty to support the case that much of the pick-up in inflation over the past few months can be viewed as transitory/temporary, there are also good reasons — not least the activities of the Fed — for thinking that this is not the whole of the story. Thus used-car prices might start to decline but the surge in home prices is soon going to bite: The rent paid by tenants as well as owners’ equivalent rent (OER), the latter a number that is affected by higher home prices together account for about a third of the CPI. As I mentioned the other day, asset-price inflation cannot neatly be confined to one “box.”

The longer this “transitory” period of higher inflation endures, the greater the risk that inflationary expectations will become embedded in the “real” world (bond yields may show no serious signs of any impending concern, but that owes a lot to the Fed’s machinations, and, in all likelihood, some four- dimensional chess by bond investors). Inflation has a nasty habit of feeding on upon itself. And it can, as Bloomberg’s John Authers has put it, be “habit-forming.” This partly a matter of expectations but can also be helped along by factors such as the way that, once inflation gets going, certain mechanisms start to kick in that can easily have the effect of ratcheting up the rate still further.

For example (via CNBC):

The Social Security cost-of-living adjustment for 2022 could be 6.1% due to inflation, according to a new estimate.

That would be the biggest increase since 1983, according to non-partisan advocacy group The Senior Citizens League, which calculated the figure. It’s also a bump up from last month’s estimate, when the increase for next year was expected to be 5.3%.

Authers points out that “the last time core inflation was this high, the Fed funds rate was 4.75%, and the 10-year Treasury was yielding more than 7%.” He adds that “we aren’t going back to those levels anytime soon,” which is right for now — and that’s just as well. To revert to a piece that Brian Riedl wrote for the Washington Post not long after the presidential election, seven months and — I’ve lost count — a trillion or more ago (my emphasis in bold):

Altogether, the CBO projects that the national debt — which has already more than doubled, to 100 percent of GDP, since the Great Recession — will approach 200 percent of GDP within three decades and continue to rise steeply thereafter. By 2050, interest payments will consume nearly half of all tax revenue and push annual budget deficits to 12.6 percent of GDP — the equivalent of $2.5 trillion today. The CBO assumes this large debt will eventually slow the economy and reduce family incomes.

And that is the rosy scenario of peace, prosperity, no new government initiatives and modest (if steadily increasing) interest rates. But what happens if interest rates exceed the projections by even one percentage point?

Should that occur, over 30 years $30 trillion in interest costs would be added to the debt, pushing it to 264 percent of the economy’s value, a ratio that is unprecedented in modern economies. And the rate of debt accumulation would be accelerating. By the time today’s babies are in the workforce, two thirds of their federal taxes would simply pay the interest on the national debt.

No new government initiatives, eh?

Authers writes that “maybe a little more evasive action on inflation would be a good idea”, but I don’t think that there is much ‘maybe’ about it. As Senator Pat Toomey (R., Pa.) put it on Thursday, “past experience has shown it’s very difficult to get the inflation genie back in the bottle.” With the emergence of that genie looking increasingly likely (if it hasn’t happened already), there is an almost overwhelming case for the Fed to do something while rates are at a level where it still can, although, even now, the prices of certain asset classes are so high that any change of course is going to be far from painless.

On the other hand, consider the alternative.

And then consider whether committing to a fresh $4 trillion in new spending is the wisest thing to do. It shouldn’t take long.

The Capital Record
We released the latest of a series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 26th episode David hosted Peter Boockvar, the chief investment officer of the Bleakley Advisory Group and a regular CNBC contributor. Formerly Peter was the chief market analyst at the Lindsey Group.

And the Capital Matters week that was . . .

Woke Capitalism
Tim Busch:

Most of all, by dabbling in politics on the right or left, companies will only contribute to America’s coming apart. As of January, more Americans trust business than trust government, likely because companies, by creating the products and progress that improve lives, are unifying in a way that politicians are not. Why would we in corporate America throw away that trust by adopting the divisive style that people dislike? If the business community separates into liberal firms and conservative firms, some will surely find a market niche. But it does the country no good for businesses to win some customers by implying that others are not just wrong but evil.

So what’s a right-leaning business leader to do? Or a left-leaning one who’s concerned about the current trend? Perhaps the best approach is to take a stand — against corporate involvement in political issues. CEOs should speak up and say that business is better than political grandstanding. A new seven-figure-plus ad campaign by Consumers First Initiative calls out American Airlines, Coca-Cola, and Nike with this exact message: Serve your actual customers, not would-be political masters. The business community as a whole should say the same thing, loud and clear.

The alternative is to court disaster. If companies get in the business of politics, then politics will dominate business. That’s a surefire way to undermine our economy and stifle the innovation and opportunity that Americans deserve. We don’t need two business communities at war with each other, because the country will lose. Corporate America should be less politicized, not more.

Dan Mclaughlin:

There is a Black Lives Matter movement and slogan, and then there is the Black Lives Matter organization — specifically, as Jim Geraghty details, the BLM Global Network Foundation, which is part of the Tides Center, a left-wing octopus approaching $1 billion in annual revenue. The BLM Global Network Foundation itself brought in more than $90 million in 2020 and ended the year with $60 million in the bank — nice work if you can get it. (The BLM Global Network Foundation is distinct from the Black Lives Matter Foundation, which according to Buzzfeed is not even affiliated with the movement and just soaks up money from gullible donors.) Lots of well-meaning Americans support the anodyne aspiration behind the slogan — who, after all, thinks that black lives should not matter? More than a few big corporations, thinking that they could appeal to those same aspirations, gave money to the BLM Global Network Foundation. Last summer, the Daily Signal rounded up 18 companies that either admit to giving money to the organization or made public disclosures that appear to confirm support. The list includes well-known brands such as Amazon, Microsoft, Nabisco, Gatorade, Unilever, DoorDash, Airbnb, Dropbox, Fitbit, and Tinder. (Other prominent corporate donors appear to have invoked only the slogan but chose different recipients.) . . .

Stakeholder Capitalism
Stephen Soukup:

For the better part of a quarter-century, Wall Street offered investors an opportunity to think — and invest — differently. By dint of what was called “socially responsible investing” (SRI), individuals and institutions were allowed to choose to align their investments with their values. They could sleep at night knowing that their capital was not supporting causes with which they disagreed, morally or politically. The only cost associated with this socially conscious undertaking was a hit to investment returns, which was inevitable but was accepted voluntarily as the price of peace of mind.

Over the last decade or so, however, some of the investors and activists driving SRI grew disillusioned with the project, believing that its voluntary nature prevented it from becoming a powerful force for the sort of changes they now wanted to embrace. The ESG investment movement — which focuses on environmental, social, and corporate governance factors — is slowly but surely replacing traditional SRI, introducing an entirely new methodology as well as an entirely new promise. By jettisoning the passive and “voluntary” nature of social investments, ESG promises that by being active and coercive, it can also be more effective in accomplishing specific political goals . . .

The Economy
Scott Turner:

It has been six months since President Trump left the White House and Democrats are still race-baiting the former president and Republicans. Representative Byron Donalds (R., Fla.) was yet another target of Democrats’ wrath in this respect after he was denied entry into the Congressional Black Caucus because of his continued support for President Trump.

There are those who want you to believe, as President Biden said during the election, that Donald Trump was “one of the most racist presidents” ever and that the Republican Party is just as bad. Nothing could be further from the truth. Simply take a look at the economic record of the last four years.

Before COVID-19 severely impacted our social and economic lives, black Americans were seeing real benefits from lower taxes and lower regulation. The unemployment rate for blacks reached a record low of 5.2 percent and black labor-force participation reached 63.2 percent, the highest it had been since the 2008 recession . . .

The Moral Case for Capitalism
Samuel Gregg:

Nor is it enough to explain to younger Americans the ways in which capitalism’s economic performance is infinitely superior to socialism’s record — or that of European social democracies, for that matter. Many young people also want to live in an economy which they regard as just. I can only agree.

This makes it ever more urgent for those who support free markets to double down on educating young Americans in the economic and moral case for capitalism. It means taking them through the writings of the very best free-market thinkers — people such as Adam Smith, Wilhelm Röpke, F. A. Hayek, and Michael Novak — who didn’t hesitate to defend markets on economic and moral grounds . . .

Steve Hanke and Nicholas Hanlon:

In 2001, El Salvador mothballed its domestic currency, the colón, and put it into a museum. El Salvador’s current currency regime is governed by the Monetary Integration Law. This law made the U.S. dollar legal tender and established a competitive currency regime, under which any currency that is mutually agreed upon by the parties to a transaction is legal to use.

The system has worked like a charm. Since 2001, El Salvador’s average annual inflation rate of 2.03 percent has been the lowest in Latin America. Twenty-five-year mortgages have been steady at an interest rate of around 7 percent. GDP per capita growth (measured in purchasing power parity) and export growth have both have been higher than in most Latin American countries.

Enter El Salvador’s Bitcoin law, which was hastily passed in the middle of the night of June 8. Proponents of the law, including El Salvador’s President Nayib Bukele, claim that it will make Bitcoin legal tender on September 7. As one of us recently wrote in the Wall Street Journal, it will actually make Bitcoin forced tender. Indeed, Article 7 of the law mandates that El Salvadorans must accept Bitcoin if it is offered. This will destroy El Salvador’s competitive currency regime and rob those being offered Bitcoin a choice. In addition, it will create a regulatory nightmare. The intergovernmental Financial Action Task Force (FATF) will be all over El Salvadoran banks, businesses, and other financial institutions like a wet blanket . . .

Benjamin Zycher:

Supply and demand form the oldest and most powerful framework we have for analyzing price shifts for goods and services. Increase the cost of supplying a given good, and — presto! — its price will rise, imposing economic costs not only upon the producers but emphatically upon the consumers of the good.

Which brings us to the ongoing litigation game against producers of fossil fuels, in general an effort to blame them for the purported local adverse effects of anthropogenic climate change. In May, the Supreme Court ruled 7–1 in BP PLC v. Mayor and City Council of Baltimore that federal appellate courts have the jurisdiction to examine all of the arguments made by litigants on whether such lawsuits belong in federal or state courts. The plaintiff cities and states usually prefer state courts as the venues, as they are seen as more likely to rule against the defendant fossil-fuel producers, in substantial part because the Supreme Court ruled in 2011, in an 8–0 decision (American Electric Power v. Connecticut) written by Justice Ginsburg, that “it is primarily the office of Congress, not the federal courts, to prescribe national policy in areas of special federal interest.”

So back to the lower courts we go for determinations of whether a state or federal court is the appropriate venue for a given lawsuit, with appeals becoming a certainty after such rulings are handed down. But in the larger context, this litigation game is based upon a premise that is false: that it is fossil-fuel producers who should be held responsible for the (highly uncertain) effects of increasing atmospheric concentrations of greenhouse gases (GHG) . . .

Jim Geraghty:

Way back in 2017, I jotted a quick tweet, “if your climate plan is that I give up beef or my light SUV, but you’ve got no plan to deal with this over in China . . . I’m unpersuaded.”

The folks at Vox — the publication that launched with the slogan, “the smartest minds, the toughest questions”– took issue with that perspective, and wrote that their review of China’s policies “utterly destroy the conservative argument” and concluded, “China is waging an aggressive, multi-front campaign to clean up coal before eventually phasing it out . . . China is tackling climate change with all guns blazing. The US, not China, is the laggard in this relationship.”

Here we are, four years later, and the Vox assessment has proven spectacularly wrong . . .

Andrew Stuttaford:

There is some consistency in the entire drive to a “net zero” economy (in the West) by 2050, including the fact that those pushing this agenda forward have little idea how this will be achieved technologically, or, given its possibly devastating impact on living standards, democratically (if that is still a concern).

What is certain is that this project will involve spending immense sums of money — other people’s money. Sometimes those costs will be borne by the taxpayer, sometimes by the consumer, sometimes by industry, sometimes by investors, and sometimes by a combination of one or more of the foregoing . . .

Ryan Ellis:

Every other week, it seems, the leftist tax-exempt nonprofit Pro Publica (which poses as a media outlet) publishes another tranche of tax records illegally leaked from the IRS. This disclosure, which is a federal criminal felony punishable by up to five years in prison for every count, invariably targets rich or famous taxpayers. The stories are overhyped (“how dare he claim depreciation!”), but the goal is always the same: Use IRS data which is supposed to be locked down tight to troll the rich or famous in service of higher taxes on the rest of us.

That’s why it’s so odd that the Beltway professional class (journalists, academics, Capitol Hill veterans, et al.) appear so hellbent and determined to give the IRS extra money to audit us all. Usually discussed as a “pay for” in bipartisan infrastructure packages, the idea is that if taxpayers fund the IRS to the tune of $40 billion over the next decade, the IRS will step up audits and collect an additional $100 billion in tax revenue, penalties, and interest. This is lauded as a good because of the supposed “tax gap,” the number the IRS says is the difference between taxes actually collected and taxes owed under perfect compliance. Apparently, it doesn’t occur to anyone that the IRS, which is seeking this extra $40 billion in taxpayer funding, has every incentive in the world to exaggerate this “tax gap” and to make wild promises about the new money that additional enforcement will yield for the Treasury. This plan is opposed by conservatives who have rightly urged Republicans to stay away from it . . .

Dominic Pino:

The first funding source listed on the White House’s fact sheet for the bipartisan infrastructure agreement is “Reduce the IRS tax gap,” which is the gap between what people owe in taxes and what the IRS actually collects. Biden’s Treasury Department claimed in May that $80 billion in funding for IRS tax enforcement could raise $700 billion over the next ten years. In the wake of Democrats’ new $3.5 trillion spending proposal, the Washington Post reports, “Some congressional Democrats think that stepping up IRS enforcement in particular could help bring in as much as $1 trillion in uncollected taxes.”

The Congressional Budget Office (CBO) has looked into this question before, and its expectations were much lower. In July 2020, it found that the “IRS’s funding for examinations and collections by $20 billion over 10 years would boost revenues by $61 billion, resulting in a $41 billion decrease in the cumulative deficit; increasing such funding by $40 billion over 10 years would boost revenues by $103 billion, resulting in a $63 billion decrease in the deficit.”

We have much better reason to believe that the CBO’s estimates are realistic . . .

Andrew Stuttaford:

It seems clear that both Ireland and Estonia would like at least to give the appearance of falling into line with the Biden cartel’s demands while preserving the integrity of their own tax regimes. That may be easier for negotiators to achieve in the case of Estonia (thanks to its higher headline rate) than for Ireland or, for that matter, Hungary, another nation that suffered under lengthy foreign occupation. Its prime minister, Viktor Orbán, has had this to say:

“I consider it absurd that any world organization [the OECD] should assert the right to say what taxes Hungary can levy and what taxes it cannot.”

He’s not wrong.

Estonia, Ireland, and Hungary are all members of the EU, as is Cyprus (which also has a 12.5 percent rate, was not involved in the recent talks on the minimum tax, and is unenthusiastic about the idea). Any one of those four has the ability to stop the EU signing up for the cartel as a bloc, although individual member states still could enlist.

There was a time when the U.S. used to believe in the virtues of competition. Not anymore, it seems, at least if the administration’s approach to tax is any guide. In the meantime, I look forward to the moment when those in America who are normally so quick to attack the U.S. for anything that looks like imperialism join the opposition to the proposed tax cartel.

Brian Riedl:

As lawmakers seek ways to pay for hundreds of billions of dollars in new “infrastructure” spending, advocates have seized on the federal gas tax. They remind us that Washington’s gas tax has been frozen since 1993 at 18.4 cents per gallon and has since lost more than 40 percent of its purchasing power. Increasing the rate and adjusting it annually for inflation, they tell us, would ensure a more expansive federal highway program.

But why do we even need Washington to be collecting large gas taxes and micromanaging highways and roads? States already assess their own gas taxes averaging 36 cents a gallon, which they use to control two-thirds of all surface-transportation spending without any federal involvement. Nonetheless, states also collect and send to Washington the aforementioned 18.4 cents-per-gallon federal gas tax — which in turn sends most of that money back to the states with numerous strings attached.

A common-sense solution would eliminate the federal middleman and allow states to retain and spend those gas-tax revenues on the transportation projects of their own choosing. This would mean cutting the federal gas tax to 3 cents per gallon to finance federal lands and other truly federal initiatives, and then turning back the rest of the gas tax — and surface-transportation spending — to the states . . .

Dominic Pino:

The latest Bureau of Labor Statistics inflation report sounds more alarming in the opening paragraph than it does if you read the whole thing. The Consumer Price Index for All Urban Consumers, or CPI-U, a standard measure of inflation, increased by 0.9 percent in June. “This was the largest 1-month change since June 2008 when the index rose 1.0 percent,” the BLS says. It’s a 5.4 percent increase from June 2020.

Everything’s 5.4 percent more expensive than one year ago! Well, no.

The CPI is an average. The BLS calculations are very complicated and take into account all kinds of variables. The topline summary of how it works is that BLS statisticians divide the country into 32 geographic areas and consider prices in 243 different categories. That’s 7,776 (243 x 32) different item-area combinations. First, they calculate the price index for each item-area combination — all 7,776 of them — then, they weight each category based on consumer preferences and average them together for the national CPI.

Andrew Stuttaford:

It is true that some of the factors driving the increase are likely to ease off (not least the rise in used-car prices, which is finally showing signs of turning down) as the economy normalizes. It is also true that some context is needed. (For example, despite the strong recent run-up, hotel and airline prices are below where they were two years ago.) Nevertheless, it is difficult not to feel uneasy about what might lie ahead given (1) the spending plans that the administration has in mind and (2) the fact that the immense pile of debt that the U.S. has piled up (and is piling up) makes it extremely tricky for the Fed to try to push up rates very far.

I would also be keeping a sharp eye on the housing component in the CPI. The rent paid by tenants as well as owners’ equivalent rent (OER) together account for about a third of the CPI. The sharp rise in home prices is — although there is typically a lag — going to start to have a noticeable effect on the index before too long: Asset-price inflation cannot neatly be confined to one “box.”

And then there’s the question of inflationary expectations . . .

Government Spending
Philip Klein:

If there was ever any doubt about whether Republicans should abandon the ridiculous charade of the allegedly bipartisan infrastructure bill, Tuesday night’s news should obliterate it. Senate Democrats have announced that in addition to the sham of a bipartisan agreement, they are also moving ahead with a separate $3.5 trillion package on a purely partisan basis containing every liberal wish list item but the kitchen sink.

The AP reports:

“Senate Democrats announced Tuesday that they have reached a budget agreement among themselves that envisions spending an enormous $3.5 trillion over the coming decade. The fiscal plan would pave the way for Democrats’ drive to direct a huge pool of federal resources at climate change, health care and family-service programs sought by President Joe Biden.

Senate Majority Leader Chuck Schumer, D-N.Y., announced the accord flanked by all 11 Democrats on the chamber’s budget committee after a two-hour evening meeting that capped weeks of bargaining among party leaders, progressives and moderates.”

To be clear, the plan would have Democrats ram this bill through while also expecting Republicans to vote for another infrastructure bill with nearly $600 billion in new spending. So in total, we are talking about $4.1 trillion in new spending . . .

Philip Klein:

When the United States entered World War II and rapidly ramped up military production, it drove debt to its largest share of the economy in the nation’s history. But as the crisis ended, that spending wound down, and debt returned to more sustainable levels.

What is happening now is something quite different. Even before the COVID-19 pandemic hit, the U.S. was already on an unsustainable fiscal path, primarily as a result of spending on entitlements. Starting from this already historically high baseline, Congress enacted $6 trillion worth of spending during one year, spanning two administrations. Last year, debt exceeded the size of the economy, and this year, according to the Biden administration’s budget request, it is expected to break the World War II record and reach 109.9 percent of gross domestic product.

In a sane world, now that the pandemic has receded, the focus of lawmakers would be on how to wind down crisis-era spending patterns. If they wanted to be responsible, they would even be using this opportunity to fix our broken entitlement system. Instead, they are moving in the opposite direction . . .

Dominic Pino:

Congress created a new $3.2 billion government program buried deep within an omnibus spending bill that is based on an emergency that doesn’t exist. It’s called the Emergency Broadband Benefit Program, and it will likely stick around after the pandemic emergency has ended.

How this happened is a case study in how Washington works — how free-spending habits combine with a perpetual sense of crisis to justify just about anything. As with most things, it started with good intentions and sensible steps.

When schools closed at the start of the pandemic, access to broadband Internet became a big concern. Students would need the Internet at home to do their schoolwork, families had suffered job losses, and government wanted to help make sure nobody’s access to it got cut off because of an inability to pay . . .

Dan Lips:

Fiscal conservatives haven’t had much to cheer on Capitol Hill in recent years. Even before the pandemic, Republican and Democratic leaders alike embraced a long-term path of deficit spending. The federal government’s debt is projected to grow faster than the nation’s economy, and there appears to be little political will to address the government’s structural fiscal challenges.

But there’s new hope that Congress will soon eliminate significant waste from the federal budget, thanks to a bipartisan effort by the House Appropriations Committee. Representatives Tim Ryan (D., Ohio) and Jaime Herrera Beutler (R., Wash.), the chairman and ranking member of the Legislative Branch Subcommittee, included report language for a 2022 spending bill requiring the Government Accountability Office to tell Congress how much federal agencies waste by ignoring the congressional watchdog’s recommendations.

“The Committee is concerned with the potential waste of federal tax dollars due to departments and agencies in the Federal Government not implementing GAO recommendations,” the report states. The report directs the comptroller general to provide Congress with a breakdown of the estimated financial costs of open recommendations by agency within 180 days . . .

Wayne Crews:

Unfortunately, Trump’s deregulatory agenda was not applied to every issue. His affinity for aggressive antitrust intervention, drug price controls, regulation of social-media content, and tariffs and trade restrictions (just to name a few) counteracted and complicated his regulatory-reform legacy.

Trump’s lapses and Republicans’ acquiescence in it have left the nation vulnerable to pro-regulatory agendas, such as Biden’s elimination of Trump’s deregulatory executive orders. On Day One, for example, President Biden eliminated Trump agency directives to grapple with what I like to call “regulatory dark matter” — the informal guidance that agencies issue without going through the Administrative Procedure Act’s notice-and-comment process. He’s gone further yet, even removing the official “Deregulatory” designation for reporting of rules — a transparency-enhancing measure introduced during Trump’s tenure. Biden’s agencies are now in the process of getting rid of Trump-era procedures for protecting the public from guidance document abuse to boot.

Expect more unilateral action, such as from the Federal Trade Commission, which has indicated moves to ditch bipartisan Obama-era restraints on antitrust enforcement. In this and other areas, the responsibility for administrative-state bloat is shared by Republicans, who never truly occupy the driver’s seat no matter who the president or his appointees are . . .

Iain Murray:

President Biden’s sweeping executive order on competition is a strange beast. It lurches from lofty claims about encouraging competition to niggling complaints about undisclosed airline checked-bag fees. The order has the force of law but also tries to direct agencies that are supposedly independent of presidential control. Most important, it’s a further step toward presidential usurpation of legislative and judicial power.

Yes, technically everything in the order is already authorized in one way or another by current law. However, the president is also constrained on how he directs officials by “rules about rules” such as the Administrative Procedure Act (APA.) The Trump administration, to its credit, tried to strengthen rules about rules by issuing what my colleague Wayne Crews calls “final rules on guidance,” or FROGs, that restricted the use of guidance documents to get around the APA. One of Biden’s early executive orders stomped on these FROGs to make it easier for his officials to issue de facto rules without notice and comment, as required by the APA. The president is prejudging the results of the rulemaking process. That may be the least of the problems with this order . . .

AntitrustRobert H. Bork, Jr.:

When Daniel Oliver, the chairman of the Federal Trade Commission under Ronald Reagan, comes out in The American Spectator in favor of realigning antitrust law to break up large corporations — “big can be bad after all” — it should be news. The only thing more counterintuitive would be an Instagram post of current FTC chair Lina Khan engrossed in a copy of Free to Choose.

Oliver’s change of heart, like that of many leading conservatives, is fueled by white-hot anger at woke corporations — social-media giants that cancel posts and stamp warning labels on conservative opinions, online retailers that blacklist books, and other businesses that throw their economic might behind progressive causes. While I am skeptical of Oliver’s claim that the suppression of the Hunter Biden laptop cost Donald Trump the election, he’s not wrong to imagine woke legions in content departments always at work like diabolical elves, suppressing what they see as indefensible points of view. The result is an ideological bowdlerization of social media that ought to — and does — make every conservative’s blood boil.

Things are so bad now, Oliver informs us, that Judge Robert Bork, who saw consumer welfare as the anchor of antitrust law, would today be paddling furiously away from his life’s work. But as Judge Bork’s son, I have to say I doubt it . . .

Steve Hanke:

As last week’s meeting of G-20 finance ministers in Venice, Italy, wrapped up, there was one big winner: the International Monetary Fund (IMF). Under the guise of assisting countries in their efforts to finance COVID-relief efforts, the IMF will issue $650 billion in special drawing rights (SDRs). That’s a whopping 120 percent increase in the stock of outstanding SDRs. These will be distributed to the IMF’s 190 member countries in proportion to their quotas.

SDRs are a reserve asset — a kind of “paper gold,” to use a self-contradictory description — created out of thin air by the IMF. They were first issued in 1969 when experts at the IMF feared that there would be a shortage of international reserves and a liquidity squeeze that would result in a worldwide deflation. As is often the case, though, the experts were wrong. Since 1969, there has been an explosion in world reserves via the accumulation of U.S. dollars by foreign countries. Contrary to the experts’ expectations, SDRs have proven to be unimportant in that respect.

But that hasn’t stopped the IMF bureaucrats from trying to drum up ways to make SDRs “useful,” so that the fund can produce more of them and expand its scope and scale of operations. Never one to let a crisis go to waste, the IMF has used the COVID pandemic to strike gold . . .

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