It’s clear the two most important issues in this election year, other than the legal troubles of the presumptive Republican nominee, are inflation and immigration. The immigration problem is a topic for another day.
According to some news reports, even commercials, inflation is out of hand. Those making that claim are mistaking high prices for inflation. Inflation and high prices are not the same thing. Inflation is the rate at which prices are rising, especially the prices of consumer goods. High prices are just that, high. Of course, “high” is an imprecise term having meaning only in historical context or by comparison to other countries. The right questions are: What is the inflation rate today compared to what it has been? And why are some prices so much higher than they were pre-covid?
In January, the most recently available data, the inflation rate was 3.1% down from a high of 9.1% in June 2022. From 1995 until 2020 inflation averaged about 2.5% per year, very near the Fed’s long-run, 2% target. Forecasts for the rest of 2024 predict an inflation rate of 2.8% falling to 1.8% in 2025. Therefore, inflation is not a problem if forecasts are about right.
Slowing inflation is called disinflation meaning prices are rising but at a decreasing rate, not that prices are falling. Some people are calling for prices to be rolled back to pre-covid levels. Falling prices is called deflation, a negative inflation rate. Deflation was what forced many people out of work and into poverty during the Great Depression. Even slow deflation means incomes fall and unemployment rises. That is why most economists think deflation is worse than inflation.
The state of the economy is always important, doubly so in a presidential election year. However, because the economies of developed countries are so interconnected and depend on trade, U.S. economic policy will have little effect on inflation, regardless of who sets it. As a matter of fact, U.S. inflation will be mostly determined by factors no American president can influence. What Hamas, Israel, Iran and its Houthi surrogates, China, and Vladimir Putin do in the next several months will be the dominant influences on our inflation rate. With its control over the world price of oil, throw in Saudi Arabia for good measure.
Because of war in the Middle East cargo ships must be rerouted from the Suez Canal and the Red Sea to much longer routes around the Southern tip of Africa. That means higher shipping costs, longer transportation times and new kinks in global supply chains. These kinks are unlikely to disrupt shipping to the extent covid did so inflationary effects should not be as great. Still the Fed will find it difficult to keep inflation from rising again. That calls into question the inflation forecasts mentioned above.
That’s the story about inflation. Why are prices of many things so much higher than their pre-covid levels, some 30 percent higher or more? Part of price runups can be blamed on world-wide supply chain breakdowns which reduced supplies of many goods, basic supply and demand economics. More troublingly, some firms in highly concentrated industries took the opportunity to increase prices beyond what was attributable to supply shortages.
As of 2017 concentration in finance and insurance, transportation, and wholesale industries has increased significantly and in retail trade by most of all. Many firms in those industries have reported record profits since covid has abated a bit. That has happened because, unlikely firms in less concentrated industries, firms with little competition face fewer pricing constraints.
Stemming the tide of rising industrial concentration is the job of Congress, the law-making branch of government. Presidents can only propose legislation. Over the last couple of decades Congress has had little appetite for curtailing the power of large firms, quite the contrary, in fact.
The short story is the President, irrespective of who that is, has essentially no power over inflation but inflation is not really a problem anyway. No use basing your vote for President on that issue. If you are interested in curtailing the power of large firms, pay close attention to congressional races. You won’t find much help on Mississippi’s ballot on that score though.
Patrick Taylor lives in Ridgeland.
