By Bruce WD Barren, Economist with Paul Ebeling, Analysts
Over the past week I have been interviewing international economist Bruce WD Barren about the coming inflationary effects of Mr. Biden’s outlandish policies, below is what I learned, as follows:
The Story: In the US economy, the real annual inflation rate in the last 20 yrs has typically been around 2% to 4%.
The periods of highest inflation in the United States in the 20th Century occurred during the years after World Wars I and II and in the 1970’s. The period of lowest inflation actually, deflation was the Great Depression of the 1930s.
Deflation is negative inflation; during deflation, most prices in the economy are falling.
Hyperinflation is an outburst of high inflation that is often seen, though not exclusively, when economies shift from a controlled economy (Soviet Union and China) to a market-oriented economy.
In the last 20 odd yrs, inflation has been relatively low in the US economy, with the Consumer Price Index (CPI) typically rising 2% to 4% per yr according to the Federal Reserve.
Looking back over the 20th Century, there have been several periods where inflation caused the price level to rise at double-digit rates, but nothing has come close to hyperinflation as was seen in Weimar Germany before WWII and Hungary after WWII.
Inflation in the US
Diagram A below shows the level of prices in the CPI, stretching back to 1913. In this diagram, the base years when the CPI is defined as 100 are set for the average level of prices that existed from Y 1982 to Y 1984. Diagram B below shows the annual percentage changes in the CPI over time, which is the inflation rate.
Let’s take a closer look at Diagram B. The 1st 2 waves of inflation are easy to characterize in historical terms: they are right after World War I and World War II.
However, there are also 2 periods of severe negative inflation—called deflation in the early decades of the 20th Century.
One of these periods followed the deep recession of 1920–21 and the other was during the Great Depression of the 1930s.
Since inflation is a time when the buying power of money in terms of goods and services is reduced, deflation is a time when the buying power of money in terms of goods and services increases.
For the period from Y 1900 to about Y 1960, the major inflations and deflations nearly balanced each other, so average annual rate of inflation over these yrs was only about 1% per yr. A 3rd wave of severe inflation arrived in the 1970’s and departed in the early 1980’s under President Reagan.
Times of recession or depression often seen in times when the inflation rate is lower, as in the recession of Ys 1920–1921, the Great Depression, the recession of Ys 1980–1982, and the Great Recession in Ys 2008–2009.
There were actually a few months in Y 2009 that were deflationary, but not at an annual rate.
Recessions are typically accompanied by higher levels of unemployment, and the total demand for goods falls, pulling the price level down as we saw in the COVID -19 instant recession we saw this time last yr’
Conversely, the rate of inflation often seems to start moving up when the economy is growing very strongly, for example immediately after wartime.
The above is the official Fed line.
Mr. Barren lays out the inflation facts you will not hear, as follows:
Projected annual inflation rate in the United States 2010-2021 Published by Statista Research Department, on 20 January 2021; this statistic shows the annual inflation rate in the US from Ys 2010 to 2019 with additional projections up to Y 2021. The data represents US city averages. The base period was Ys 1982-84.
In economics, the inflation rate is a measurement of inflation, the rate of increase of a price index in this case: CPI (consumer price index). It is the percentage rate of change in prices level over time. But some how the Fed in its published numbers has decided to leave out the numbers that American’s experience daily, food and fuel.
Food inflation is a major part of the Consumer Price Index. It is always discussed in the Fed’s monthly CPI report. It includes pricing changes for “food away from home” and “food at home“.
For example, the pair in January posted respective Y-Y increases of 3.9% and 3.7%.
Some of the foods the BLS surveys every month for inflation include meats, poultry, fish, eggs, cereal, bakery products, dairy, beverages, and various fruits and vegetables.
Most increasing regarding the prices for Bread, 1997-2021 ($5) According to the US Bureau of Labor Statistics, prices for bread were 91.58% higher in 2021 Vs 1997 (a $4.58 difference in value). Between 1997 and 2021: Bread experienced an average inflation rate of 2.75% per yr. This rate of change indicates significant inflation.
The average price of food in the United States rose 3.8% in the 12 months ended January 2021, slowing from the prior 3.9% increase in December 2020, according to the latest inflation data published on 10 February 2021 by the US Labor Department’s Bureau of Labor Statistics
Mr. Barren states: “Caution must always be used in misreading the Federal Inflation Rate for it not only does not reflect food and energy which are both experiencing higher than usual growth rates, especially energy which is on an upward trend to return to the 2019 level, as noted below.. Separately, food inflation is running at 3.90 percentage, also higher than the reported inflation rate itself and this adversely affecting the lower income families directly.
“However, expect the above to continue to rise even more dramatically as Americans return to work as more Covid vaccines are administered and America’s confidence grows as our pandemic comes under control. Further affecting food prices will be impaired due to current weather conditions, now affecting the United States, especially in our Southern States.”
Gasoline Inflation in the United States (1968-2021)
The price of gasoline declined 8.6% in the 12 months ended January 2021 compared to the 15.2% drop reported in December 2020, according to the most recent inflation data published 10 February 2021 by the US Labor Department’s Bureau of Labor Statistics (BLS).
Gasoline is an important category reported within the BLS’s monthly report on consumer inflation, the Consumer Price Index. Gasoline (all types) is listed as a subcategory under the overall Energy index for commodities.
Gasoline inflation as a component of the CPI’s “all items” index is a part of the data set used in calculating inflation rates. However, because gas prices tend to be more volatile, they along with food prices are stripped out when calculating core inflation rates.
According to the US Bureau of Labor Statistics, prices for gasoline (all types) were 1,477.23% higher in 2021 Vs 1935
Between Ys 1935 and 2021: Gas experienced an average inflation rate of 3.26% per yr. This rate of change indicates significant inflation.
In other words, gas costing $20 in Y 1935 would cost $315.45 in Y 2021 for an equivalent purchase. Compared to the overall inflation rate of 3.49% during this same period, inflation for gas was lower due in part to the price fall during Y 2020 VirusCasedemic.
Inflation around the world
Global food prices rose for an 8th month running in January to their highest since July 2014, the UN’s food agency said last Thursday.
The UN’s Food and Agriculture Organization’s food price index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, averaged 113.3 pts last month December’s 108.6, revised up from 107.5. Jumps in cereals, sugar and vegetable oils led the rise.
The pattern of global inflation has been mixed over the last several decades. Many industrialized countries including the US had relatively high inflation rates in the 1970’s.
For example, in Y 1975, Japan’s inflation rate was over 8%, and the inflation rate for the United Kingdom was almost 25%. In the 1980’s, inflation rates came down in the United States and in Europe and have largely stayed down because the Key metrics have been stripped out.
Note: The closest the United States has ever gotten to hyperinflation was during the Civil War, 1860–1865, in the Confederate states.
Some analyst are now saying that Mr. Biden’s government, fiscal and monetary will lead the nation into a period of hyperinflation, as never seen before.
Have a healthy week, Keep the Faith!