On Wednesday, the Labor Department reported the core consumer price index (CPI) inflation rate rose 5.4% over the past year to the highest 12-month rate since 2008.

Core inflation is a measure of the average change overtime in the prices paid by urban consumers for a basket of goods and services, like clothes, automobiles, and recreation, minus food and energy prices which are volatile.

Fed Chair Jerome Powell continues to see current high inflation readings as temporary. He acknowledged inflation may persist for longer than policymakers previously expected.

By contrast, inflation hawks, such as editorial writers for the Wall Street Journal, expressed concerns querying “when does transitory …become persistent?” They disagree with the administration’s reasoning that the proposed multi-trillion dollar expenditure will subdue inflation. An inflation hawk is willing to allow interest rates to rise to keep inflation under control.

Where is there a consensus for the causes of inflation?

America’s economic recovery has caused a mismatch between supply and demand in a few key sectors. Businesses are trying to rebuild their inventories and overcome supply chain hurdles caused by Covid-19. Trillions of government relief dollars and easy monetary policies have bolstered demand, causing upward price pressures.

A global semiconductor shortage has retarded auto production, pushing up the prices of used vehicles. These increases have accounted for an outsized portion of rising inflation in recent months.

Hopefully, the rate of increase in prices has slowed for the following reasons: (1) the surge in coronavirus infections has retarded some business activity and (2) pandemic-related supply disruptions should abate. Aneta Markowska, chief economist at Jefferies, highlighted reasons for caution. She said, “It is like the equivalent of going from a 104-degree to a 101-degree fever.”

Some positive statistics:

  • Apparel prices were flat in July after rising .7% in June.
  • Transportation prices declined after rising more than 1% at the end of the second quarter.
  • Used car prices rose only .2% in May-far less than the 10% rise in April.

The Center for Disease Control and Prevention issued this dire warning. “It (Delta Variant) is as contagious as chickenpox. It is more transmissible than the common cold.”

The Delta variant has slowed U.S. economic activity. Southwest Airlines reported a slowdown in bookings and a rise in trip cancellations. OpenTable, a restaurant-reservation platform, posted tracked restaurant-reservations were down 8%. McDonald’s, NBC, and Capital One postponed reopening offices.

Despite inflation concerns, Congress is embarking on several major fiscal programs. On a strictly partisan basis (50-49), the Senate passed a far-reaching $3.5 trillion social policy measure. Congress, on a bipartisan basis (69-30), passed a $ 1 trillion infrastructure bill. Both measures face hurdles to enactment because of opposition from conservatives, moderates, and Progressives in the House.

This infrastructure package is the largest federal investment in our nation’s aging public works system in more than a decade. Main areas of spending are transportation, utilities, and pollution cleanup.

The $3.5 Trillion Social Safety net program creates the largest expansion of the federal safety net since the Great Society programs of the 1960’s.

I experienced the horrendous impact of stagflation in the late 1970’s and early 1980’s—double digit inflation and an unemployment rate greater than 10%. To break inflation’s back, in June of 1981 then Fed Chairman Paul Volcker raised the federal funds rate to 20%. While no single factor caused Stagflation, many economists pointed to our failure to pay for the Vietnam War and the Great Society Programs. Unless there is a sea change in Congress, future federal deficits could average $1.2 trillion per year for the next decade.

The Congressional Budget Office projects staggering deficits- $3 trillion for 2021. Future deficits could average over $1.2 trillion annually through 2031. All these measures goose demand.

Originally published in the Sarasota Herald-Tribune