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**MARCH 11, 2022**
Kuttner on TAP
More Inflation: Now What?
****
Some of it is purely opportunistic. We need an excess profits tax and
maybe price controls.
Inflation rose at an
annual rate of 7.9 percent in February, driven primarily by dislocations
resulting from Russia's war on Ukraine, notably in energy and food.
This came on the heels of supply chain inflation that accelerated in
2021.
The question now is whether we are in a cycle like that of the 1970s,
where inflation triggered by random shocks on different sectors becomes
embedded in the economy and self-perpetuating, as expectations feed on
themselves.
In the 1970s, there was sectoral inflation, not just in energy triggered
by the two OPEC oil price hikes, but in food (triggered by bad
harvests), in health care (the result of the new Medicare program having
no limits on what doctors could charge), and in housing (the result of
people putting more money into homes as an inflation shelter and bidding
up prices).
This time, sectoral inflation is occurring not just in energy and in
food but in consumer products, notably cars, suffering from supply chain
shortages of semiconductors; and in housing, where a long-term scarcity
of affordable housing keeps bidding up prices.
Some economists, most notably at the Federal Reserve, still believe that
the core rate of inflation will begin to subside if and when the
Russia-Ukraine war ends, and supply bottlenecks begin to ease. What is
not occurring is wage-driven price hikes. Wages are now lagging far
behind price increases.
One well-informed economist, Charles Goodhart
,
formerly a senior official of the Bank of England, argues that the long
period of very low inflation and low interest rates was the result of
global labor oversupply, which pushed down wages everywhere. (Someone
referred to this as the reserve army of the unemployed.) Consumers
ostensibly got bargains, but workers (mostly the same people) got
screwed.
Goodhart predicts a long-term period of higher inflation as world labor
costs rise. It remains to be seen whether he is right, since there is
still plenty of global labor oversupply. But rising inflation smokes out
falling real wages (leading to what someone referred to as class
struggle).
For now, the question is how to prevent inflation that is purely
opportunistic. Sens. Sherrod Brown and Sheldon Whitehouse have proposed
a windfall profits tax
on Big Oil. If high inflation continues, there is also a case for
revisiting price controls, which were used to salutary effect in the
early 1970s by that Bolshevik Richard Nixon.
****
~ ROBERT KUTTNER
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**Robert Kuttner's latest book is**
The Stakes: 2020 and the Survival of American Democracy
.
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