Conflict, Covid, China and Congress give inflation historic mementum

 

Gordon L. Weil

Your wallet is at war.  It’s losing to inflation.

Almost everything from gasoline to food to computers costs more and there’s a good chance that a tax increase will top it off.

The reasons are clear: conflict, Covid, China and Congress.   

Most of us feel far removed from major forces of change.   We struggle to recover the lives we led just a few years ago.  But the interconnected world reaches into the pockets of average people.

You can see it in most L.L. Bean catalogs. Everything, except some boots, is marked “imported.” Imports are cheap, thanks to lower cost labor and lax environmental rules elsewhere, compared to the company’s traditional Maine-made products.  American consumers have liked it cheap and the heck with world politics. That will change.

It is impossible now to ignore world events and avoid their effects. Hostile relations among nations are leading to economic warfare among emerging zones seeking greater self-sufficiency. A zone led by China and one led by the U.S. seem to be forming.  Though each plays in the world economy, each also seeks strategic advantage by reducing reliance on the other.

There may be outright conflict in places like Ukraine or possibly Taiwan. The effect is felt by most people in the form of higher prices.  While it is easy to blame President Joe Biden or either party in Congress for inflation, the forces behind higher prices are far more powerful than federal deficits.

The most obvious and immediate upward price pressure comes from the Ukraine war. Russia is the largest supplier of oil and natural gas to Europe.  The EU now understands that its ability to fight Russian aggression is limited by its dependence on those fuels.  It is turning to alternate supplies all of which are more expensive.

The U.S. and Canada will step up more expensive fracking and send fuel to Europe.  Qatar will add its natural gas.  While Europe reduces Russian supplies, the price of fossil fuels increases. Oil and gas trade is conducted in a world market, so rising prices are felt everywhere.

American suppliers charge American customers more.  There are not enough renewables to save the day, and they have their own price tag.

Food supplies and most other products must be transported from their origins to end users.  The price of motor fuel figures in almost everything we buy or seek to sell.    Higher fuel costs yield higher costs of almost everything. 

The impact of Covid-19 on national economies as people have hunkered down and reduced production and transport has also led to shortages of consumer goods and resulting higher prices.  The notion of the “supply chain” and its interruptions has entered the everyday vocabulary.

Another effect has been a change in the attitude of many workers who resist low pay levels and part-time hours that undermine their quality of life.  The Great Resignation of millions of workers is real and limits output or raises wages, both leading to price increases.

At the same time, the Chinese government has moved to reduce the free market that had grown up there.  The Communist Party is regaining control over what is produced, by whom and at what price.  That way, it can use trade and finance as weapons in international relations. 

"Rare-earth elements are necessary components of more than 200 products across a wide range of applications, especially high-tech consumer products,” says the U.S. Geological Survey.  China accounts for 97 percent of the world’s supply.  Moving away from its dominance will make those products more expensive. 

In the short run, the economy is growing as its recovers from the effects of the coronavirus.  Government is able to cushion the shock of rising prices.  But that is first aid, not a cure for inevitably higher prices.

The Federal Reserve is now increasing interest rates, which have been maintained at extremely low levels to spur growth in recent years.  Going back to traditional levels should limit inflation by slowing an overheated economy and allowing it to manage itself.  Over the long term, higher rates will raise the cost of a home or a college education.

To these increases in the market price of almost everything must be added the planned federal tax increase at the end of 2025.  In the latest tax law, Congress gave a permanent break to corporations, but for individuals it was only temporary. Without congressional action, taxes will automatically climb back to their old levels.

The economy and the economic position of individuals will not again look like it did in the early years of this century.  While we may suffer the effects of inflation now and expect government to fix it, most prices will be permanently higher.

This is not merely old-fashioned inflation. This is history presenting its bill.