Inflation Has Spiked, But Nobody Is to Blame

March 7, 2022

When something goes wrong economically, it’s natural to find fault in political leadership, and oftentimes mistaken policies are culpable. The Covid pandemic presented challenges not seen in a century, and there were no accurate, comprehensive, and reliably useful data to predict either the evolution of the pandemic or exactly how economies would respond to public health measures that became unavoidable. The virus did not care about national boundaries, and national economies were far more interdependent that when the Spanish flu pandemic had struck just over 100 years earlier. That being said, a key driver behind U.S. President Biden’s falling voter approval scores reflects blame the spike of inflation on his watch.

Current U.S. consumer price inflation of 7.5% is the highest in four decades and up from only 1.4% a year ago. U.S. producer prices have soared even more dramatically over the past year from 0.8% to 9.7%. The inflationary legacy of the pandemic is now being inflamed considerably further by Russia’s unprovoked invasion of Ukraine and skyrocketing world commodity prices that such triggered. The operative word here is “world.”

If the current rise of U.S. inflation were in fact predominantly due to inappropriate fiscal policy or overly loose Fed policy, one would not expect the U.S. price experience to be mirrored in so many other economies, and a vicious cycle of mutually reinforcing dollar depreciation and internal price growth acceleration — as indeed occurred during the 1970s — would be materializing. The weighted DXY dollar index, in contrast, touched its strongest level earlier today since mid-May 2020.

What about CPI inflation in other parts of the world? Comparing the latest reported 12-month change in consumer prices to year-on-year changes over the previous 12-month period, we find inflation increasing from 0.9% to 5.8% in Euroland, from 0.9% to 3.5% in Australia, from 1.4% to 5.9% in Indonesia, from -0.6% to +0.5% in Japan, from -0.3% to 0.9% in China, from 1.1% to 3.7% in South Korea, from 4.1% to 6.0% in India, from 8.7% to 12.2% in Pakistan, from 2.2% to 9.9% in the Czech Republic, from 3.0% to 9.4% in Romania, from 2.6% to 9.2% in Poland, from 2.7% to 7.9% in Hungary, from 0.4% to 13.9% in Lithuania, from -0.2% to 8.9% in Latvia, from 5.2% to 8.7% in Russia, from 6.1% to 10.0% in Ukraine, from 15.6% to 54.4% in Turkey, from 4.6% to 10.4% in Brazil, from 40.7% to 50.7% in Argentina, from 0.7% to 5.5% in the U.K., from -0.5% to 2.2% in Switzerland, from 1.6% to 3.7% in Sweden, from 4.1% to 6.2% in Iceland, from 3.7% to 7.8% in Jamaica, from 3.2% to 5.7% in South Africa, and from 3.5% to 7.1% in Mexico.

CPI price accelerations among the larger Western European countries using the euro were to 5.1% from 1.6% in Germany, to 3.6% from 0.6% in France, to 6.2% from 1.0% in Italy, to 7.5% from -0.1% in Spain, to 9.6% from 0.3% in Belgium, and to 7.6% from 1.6% in the Netherlands.

At the producer price level, inflation over the past year has accelerated to 105% from 27.1% in Turkey, to 23.1% from 6.7% in Russia, to 30.6% from 0.4% in Euroland, to 8.6% from -1.4% in Japan, to 19.8% from -0.8% in Sweden, to 9.4% from -0.2% in the U.K., to 9.1% from 0.3% in China, to 9.2% from -0.1% in Malaysia, to 5.4% from -2.1% in Switzerland, to 8.6% from -1.4% in Japan, to 4.1% from -5.3% in the Philippines and to 13.0% from 2.0% in India.

The pandemic presented governments with a set of undesirable choices. In spite of efforts to impose social distance, requests that people wear face masks, and the roll-out within a year of virus onset of highly effective vaccines, a widely believed under-reported global death count from Covid-19 has now surpassed six million people. With recent concern that the world might be careening toward a third world war, such a milestone has very ominous connotations from the last world war. If the Biden Administration and Fed had turned off fiscal support and begun normalizing monetary policy a year ago, growth of GDP would not have recovered nearly as much as such did, long-term unemployment would have stayed much higher, yet inflation would still be up appreciably and poised for further sharp acceleration in light of geopolitical developments.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.




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