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In These Times - February 14, 2022

...a one-time ​“inflation adjustment” tax cut for lower- and middle-income households would help them through the post-pandemic transition. It could be financed by taxing the monopoly rents of the oil, technology, pharmaceutical, and other corporate giants that made a killing from the crisis.

Although some supply shortages were anticipated as the global economy reopened after the Covid-19 lockdowns, they have proved more pervasive, and less transitory, than had been hoped. In a market economy that is governed at least in part by the laws of supply and demand, one expects shortages to be reflected in prices. And when individual price increases are lumped together, we call that inflation, which is now at levels not seen for many years.

Nonetheless, my biggest concern is that central banks will overreact, raising interest rates excessively and hampering the nascent recovery. As always, those at the bottom of the income scale would suffer the most in this scenario.

Several things stand out in the latest data. First, the inflation rate has been volatile. Last month, the media made a big deal out of the 7% annual inflation rate in the United States, while failing to note that the December rate was little more than half that of the October rate. With no evidence of spiraling inflation, market expectations – reflected in the difference in returns on inflation-indexed and non-inflation-indexed bonds – have been duly muted.

One major source of higher inflation has been energy prices, which rose at a seasonally adjusted annual rate of 30% in 2021. There is a reason why these prices are excluded from ​“core inflation.” As the world moves away from fossil fuels — as it must to mitigate climate change — some transitional costs are likely, because investment in fossil fuels may decline faster than alternative supplies increase. But what we are seeing today is a naked exercise of oil producers’ market power. Knowing that their days are numbered, oil companies are reaping whatever returns they still can.

High gasoline prices can be a big political problem, because every commuter confronts them constantly. But it is a safe bet that once gasoline prices return to more familiar pre-Covid-19 levels, they won’t be fueling any remaining inflation momentum. Again, sophisticated market observers already recognize this.

Another big issue is used-car prices, which have highlighted technical problems with how the consumer price index is constructed. Higher prices mean that sellers are better off vis-à-vis buyers. But the consumer price index in the United States (unlike in other countries) captures only the buyer’s side. ...
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