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The US Bureau of Labour Statistics (BLS) recently released data on inflation. The released data indicate that consumer prices in the United States surged upward reaching the highest inflation rate since 1982 at 7.0 per cent compared to 12 months ago. However, the average wages rising only 4.0 per cent during the same period. The inflation result has the potential to reshape the narrative around the pandemic recovery and the response of the Federal Reserve to the inflation surge.
A significant part of this increase is higher energy price up by 49.6 per cent in December last compared to a year before. Cars and trucks, car parts electronics also recorded significant rise in their prices. The price of imported manufactured goods rose by 6.3 per cent. Food prices also rose 6.3 per cent compared to a year ago.
However, the BLS' "core inflation rate" which excludes volatile items such as food and energy, rose 0.6 per cent in December relative to 0.5 per cent in November. Also, the US dollar appreciated against the currencies of its major trading partners by 3.5 per cent measured in the currencies of the major trading partners of the US. Once shipping and transport costs are added on the implicit price of imported goods will be even higher.
Inflation appears to have become a global phenomenon; in fact the global inflation story is moving fast. Global inflation has accelerated in the final three months of 2021 after short reprieve in July-August. The Eurozone reported a 5.0 per cent annual price rise in December. Inflation in Turkey now running at 36 per cent while the country is also experiencing a currency crisis. But the inflation figures for other developed countries are also similar such as the UK 4.6 per cent, Germany 5.2 per cent, Spain 5.5 per cent and Canada 4.7 per cent.
Developing countries are also experiencing rising inflationary pressures. Brazil recorded 10.06 per cent. Even the impoverished masses of India are also faced with a 5.59 per cent rise in prices in in last December. According to the Financial Express (January 18, 2022), Bangladesh recorded 6.05 per cent rise in the Consumer Price Index (CPI) in December. The rate in the same period (December) of 2020 was 5.29 per cent.
Rising costs of inputs including labour have put great strain on business enterprises, especially small and medium enterprises in the US. Quitting jobs are at all-time high. Much of these workers, who are quitting, are above 55 years and over and taking early retirement. Many are moving between jobs. Also, majority of those who are leaving their jobs are women. Overall, work place safety has played the major role in deciding to quit the job.
The inflation data for December is definitely a cause for concern for the Federal Reserve. In a testimony before the Senate Banking Committee recently, Federal Reserve Chairman Jerome Powell clearly stated that a shortage of labour, not supplies was the main problem faced by American businesses. He further warned that the Federal Reserve was prepared to carry out interest rate hikes to choke off inflation. Such tighter monetary policy would inevitably lead to a recession.
Monetary policy actions in the US can have flow on effects around the world. Emerging and developing market economies (EDMEs) in particular must adjust their monetary policy stance to accommodate the effects of increase in interest rates and taper asset purchases as inflation rises in the US. EMDEs are already facing difficult policy options to address rising debt levels and inflation while supporting economic recovery at a time when Covid-19 infections are surging slowing the pace of economic recovery in these countries.
It is very important to understand that the current inflation spike is not the result of a rise in wage cost pressures. In fact, wage earners, especially low wage earner have been stressed by two years of a pandemic and are struggling harder to make ends meet. Rising prices significantly outweighed any wages gains in the US. US inflation has risen to 7 per cent in 2021 while wage growth has been 4 per cent
We can analyse the impact of inflation in its relation to wages. The change in the real wage is the percentage (%) change in wages minus (-) the percentage (%) change in prices. So, if wages rose by 4.0 per cent and prices rose by 7.0 per cent, the real wages declined by 3.0 per cent (7-4). Therefore, the average wage in the US declined by 3 per cent in 2021. This has meant declining real wages and a crunch on living standards.
In a comment in the Wall Street Journal by Greg McBride, chief financial analyst for Bankrate stated that this year "comes up as loss for many households. Their expenses increased even faster and chewed up all the benefits of whatever pay raise they had seen". In fact, the surge in prices is having an even more devastating impact on people with fixed income.
It is clearly evident that the driving force of inflation is not wages. Therefore, the narrative around the current inflation surge now largely centres around that while the economic success that has flowed from massive government income support programs, the sting in the tail of the massive government stimulus programs is a rising cost of living - that is inflation. The Wall Street Journal also agrees that excessive federal social spending has contributed to price rises.
There were major US federal stimulus programs amounting to US$5 trillion and also the Federal Reserve lowered interest rates and increased substantially money supply. These expansionary fiscal and monetary policies provided economic support to the economic momentum to continue and helped support millions of household to maintain their living standards.
In the US, the economy has largely been performing well since the second half the 2020 through to 2021 both in terms of Gross Domestic Product (GDP) and employment growth. A major factor contributing to this growth performance was massive public spending. The well performing economy also enabled the corporate sector to do very well as reflected in increased global stock market capitalisation up by US$60 trillion.
Most US corporations also enormously benefitted from the stimulus packages as well as by jacking up prices. These corporations earned a record profit of $3.14 trillion in the third quarter of 2021 before tax. Even after adjusted for tax, the amount stood at $2.74 trillion. Ten of the richest billionaires saw their net worth increase by $500 billion, led by Tesla CEO Elon Musk.
The global charity Oxfam released a briefing entitled "Inequality kills" in advance of the Global Economic Forum held virtually on January 17-21. The document paints a grim picture of the global economic order. The document shows while unprecedented accumulation of wealth by the world billionaires continues which in effect "contributing to the death of at least 21,000 people each day, or one person every four seconds".
The report further adds that the pandemic has pushed over 160 million people into poverty and an estimated 17 million people died but the world's 10 richest people have doubled their fortunes.
As inflation rises and global economic recovery slows down due to the latest surge in Covid-19 infections, the economic narrative will also change. The IMF Chief Kristalina Georgieva in a recent interview has told that tackling global debt is a top priority and assured us that inflationary pressures would ease by the end of 2022 or early 2023. She clearly advised central banks to use instruments that would push inflation and inflation expectation down because it is impacting on the people and businesses.
It would be incredibly irresponsible for central banks to listen to Georgieva and to slam on the brakes, and throw millions of people out of work, just only to head off inflation. The surge in inflation is the by-product of policies pursued by governments around the world leading to profit inflation as reflected in rise in wealth of very rich people around the world. Such profit inflation indicates rise in unearned income in the form of economic rent during the pandemic. As such the expected economic recovery in 2022 along with still rising global inflationary pressures makes it very difficult to see how global growth trajectory will play out.
The economy is much more than GDP or the unemployment rate, on both accounts the US economy is doing pretty well now given the circumstances. But economic rent extraction can cause massive resource misallocation and deeply entrench not only economic inefficiency but also create an economically very powerful oligarchy with enormous political clout.
Oxfam in its report not only provided a realistic solution to the current pandemic induced economic crisis but also to enhance economic efficiency. Oxfam recommends a "one off solidarity taxes" to stem the exponential growth of billionaires wealth based on extracting economic rent (the principal source of economic inefficiency) during the pandemic. It further also recommends 100 per cent tax on excess profit (also called economic rent)) as was suggested by President Franklin Roosevelt during the world war II. In the end a top marginal income tax rate of 94 per cent was settled on and that rate averaged at 81 per cent between 1944-1981. Therefore, given the political will, such policy recommendations can be implemented to push inflation down and reduce income inequality