If you still believe that inflation is transitory, clearly you haven’t been doing the shopping lately. Not only is it not transitory, but it’s getting worse.
The latest consumer price index (CPI) makes this all too clear. The rate in January was a hefty 7.5% higher than a year ago and is the biggest increase since 1982.
The real rate of inflation, however, is even worse than what this number indicates, because the way inflation is calculated has been changed more than two dozen times since 1980, leaving out items that tend to rise quickly.
John Williams, economist at Shadow Stats, is one of the few who still uses the old method to calculate inflation. Williams says that if inflation were still calculated the way it was in 1990, the current rate would be above 10 percent. And if it were calculated the way it was back in 1980, the rate would be above 15% -- more than double the official number.
Putting The Pieces Together
The Consumer Price Index, a widely-followed way of gauging inflation, is composed of many different products and commodities. Some of those are used just occasionally, so what happens to their prices is not crucial. But the prices of others, which are crucial, are increasing very rapidly.
Following are several examples. On Feb. 17, 2021, crude oil was approximately $59/barrel. But a year later it was nearly $92/barrel, an increase of 55%. And consumers and businesses are paying this higher price repeatedly because oil is used directly or indirectly in countless items. The price of natural gas has increased by about 75% during this time. And gasoline and heating oil also are racing ahead.
Meanwhile, the cost of food also is soaring. Steak has risen by 17% over the last year, and fish, poultry, and eggs each by about 13% (these prices vary slightly from store to store). Other food-related items like plastic dinnerware and plates have increased by as much as 100%.
Heather Long, a columnist at the Washington Post, put together a list of many other items tracked by the CPI that also are soaring. Among them are things like both new and used cars, peanut butter, furniture, and much more, all of whose prices are rising much faster than the official rate of inflation.
Energy companies are moving to green energy while distancing themselves from fossil fuels. However, supplies of these new, alternate sources are not keeping pace with demand. Moreover, financing for traditional energy has become harder to obtain, and some companies are actually abandoning fossil fuel projects.
As a result, there is a shortfall of supplies, and a new energy crisis appears to be evolving. According to the Economic Collapse Blog, “The Labor Department reported that gasoline prices have skyrocketed 40% over the past year, while natural gas has surged 22.6% and electricity is up 10.7%.” The prices of oil, gas, and uranium have been soaring, contributing to the accelerating inflation.
“A gallon of gas, on average, cost $3.47 nationwide, according to AAA, up from $2.47 a year ago. (Since this report was released, gasoline has gone higher.) In all, energy prices have spiked 27% over the course of the past 12 months, and there’s little reason to think that they will drop substantially any time soon.
The Fed’s Dilemma
The Federal Reserve attempts to keep the economy growing steadily while keeping inflation under control. Traditionally, one of the tools it uses to accomplish these objectives is adjusting interest rates. For example, when the economy is weak, it lowers rates to stimulate growth. On the other hand, when inflationary pressures build, it raises rates to bring them under control.
No one says fine-tuning the biggest economy in the world is easy, but it has become especially difficult now, and here’s why. The much higher-than-expected inflation rate is causing serious financial headaches for tens of millions of Americans and businesses, and without question the Fed needs to address this problem. But raising rates to the level necessary to stop inflation risks pulling the rug out from under the economy, and causing very steep declines in the stock and bond markets as well as in real estate.
Recently, investors were shocked to learn that the Fed was considering raising rates three times this year. Since then, their thinking appears to have changed, and now it is said they believe five rate increases will be necessary. The latest speculation is that seven or even more rate hikes will be necessary. No wonder the stock and bond markets are spooked.
So what do the experts say about this dilemma? How do they understand this problem? Here’s a sampling of their views.
At least one Fed official thinks that the increase in inflation needs to be addressed immediately and forcefully. James Bullard, President of the Federal Reserve Bank of St. Louis, said that “the inflationary shock that we are seeing now needs a big response.” Bullard said that interest rates need to be raised by at least a full percentage point by July, with more increases following that.
Peter Schiff, CEO and Chief Strategist of Euro Pacific Capital, is a name many investors recognize. In a recent interview with Fox Business, he shared the following worrisome observations. “The problem is that people still don’t recognize the box that the Fed has put us in. There is no interest rate that the Fed could set to fight inflation that the economy could withstand,” he said. “Not only would we get a massive recession and a crash in the stock market and in the real estate market, but we’d also have a much worse financial crisis than the one we had in 2008. The inflation tsunami is just getting started and the Fed is powerless to stop it.”
Economist John Williams of Shadow Stats says that if the Fed “foolishly raises interest rates, you are going to have a double dip depression, and at the same time you are still going to have high inflation. You are going to end up with an inflationary depression or a hyper-inflationary Great Depression.” Williams anticipates much higher inflation and an economic crash. But there is one way to survive the very high inflation that is coming, and that is by owning physical gold and silver.
A number of experts are also expressing their alarm at a related problem: the government’s massive and growing debt. If the Fed is forced to raise rates sharply it will be a mixed blessing, because while it may control inflation, the government will have to spend many billions more in interest on debt.
And some believe the real level of debt is much worse that what the public realizes. Among them is Tesla CEO Elon Musk, who very recently tweeted the following: «The official national debt is $30 trillion, but the true national debt, including unfunded entitlements, is at least $60 trillion – roughly three times the size of the entire US economy. Something has got to give.»
So here’s where we stand now. There are literally tens of millions of people who are suffering because of rising inflation, and something has to be done to address their plight. This means the Fed has a very difficult decision to make. Raising rates, their traditional tool to control inflation, risks undermining the economy and the markets. It also means the federal and state governments will have to pay billions more on their debt, adding to the problem. But if the Fed chooses not to do anything, inflation could continue at the current very high rate or possibly even accelerate. And at this point, kicking this can down the road appears impossible.
If we were watching this story unfold in a movie, we would be gripping the arm rests tightly and calling this a horror show. Unfortunately, these events are all too real. And no one can think of an easy solution.
Sources: bloomberg.com; cfr.org; economiccollapseblog.com; foxbusiness.com; usawatchdog.com; zerohedge.com
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.