The government can end this inflation.
The Bureau of Labor Statistics just released the Consumer Price index (CPI) number for November. The CPI increased by .8% for the month. That means for the prior 12 months, from November 2020 to November 2021, prices increased by 6.8%. That is the highest inflation rate in four decades.
In spite of both the Biden Administration and the Federal Reserve saying the inflation is transitory, it appears that is not the case. Both also say that the cause of the inflation is the supply chain disruptions mostly brought about by the labor shortage.
The truth is that the supply chain disruptions are adding very little to inflation. We know that because the economy as a whole is now producing more goods and services than was produced prior to the pandemic. If the total supply in the economy is that high, then the inflation must be caused almost entirely by other reasons.
As noted numerous times in this column over the past 10 months, the inflation is caused almost entirely by government action. That means that if the government were to reverse its actions, inflation would drop quickly.
Two government actions led to higher costs for both the consumer and for business. Two more actions caused huge increases in total demand. Excess demand is the prime cause of this inflation. That means the inflation will not be significantly reduced until the excess demand is eliminated.
Purposely Higher Energy Prices
On the cost side, the Biden Administration is trying to wean the country off of fossil fuels. As a result, it has taken action to reduce the supply of fossil fuels, both in the short term and the long term. This energy policy has led to higher gasoline, heating oil and natural gas prices. According to the White House, these price increases will not be as high as first anticipated.
That’s an inaccurate conclusion. The small dip we have recently seen in energy prices was all due to an overreaction to the impact of the Omicron variate of COVID. Now that the variant seems to be less harmful, market prices are again beginning to rise and will continue.