The Federal Reserve and the Biden administration are in a treacherous period. Even if the jobs market ultimately cools, inflation will remain volatile owing to fundamental disconnects between worker expectations and what the economy can deliver and poorly executed federal policies.
During the pandemic, many households experienced a surge in income thanks to large government transfers — household stimulus payments, enhanced unemployment benefits and assistance to privately owned small businesses — even when many folks were not working and businesses were shuttered.
Notably, 68% of those receiving unemployment benefits enjoyed higher incomes than they did while previously employed.
Until January 2021, inflation remained low, and for many months after that, consumers failed to anticipate the historic price increases that they would eventually endure.
Americans amassed about $2.5 trillion in extra savings, and they felt richer than the economy could support them on a long-term basis.
Now workers are reluctant to let go of this false prosperity.
The economy cannot produce what they expect to earn, but unions are digging in, workers are organizing at Starbucks, Amazon and Trader Joe’s, and businesses continue to complain about worker shortages. In part, the depressed level of adult participation in the workforce reflects an inflated sense of self-worth.
Many folks would rather stay at home and run through savings than work for wages they consider inadequate.
Workers lucky enough to enjoy high demand for their services during the pandemic, such as in the technology sectors, got used to job hopping and setting their own terms — working not just from home but at long distances that make even the occasional face-to-face meetings expensive.
That’s a recipe for a wage-price spiral and inflationary expectations the Fed can’t harness by raising interest rates a few percentage points. Even at current levels, real interest rates are still deep in negative territory.
Workers will be chasing their tails — demanding and getting higher wages but with businesses aggressively raising prices even more. Both businesses and households are often able to borrow at rates much lower than inflation.
Federal Reserve Chair Jerome Powell is very concerned about consumer sentiment, as tracked, for example, by the University of Michigan. It’s down, and, not surprisingly, pessimism about future household finances is an important culprit.
As consumers see an alarming pace of overall inflation, it becomes reasonable to pay prices for cars that pad manufacturers’ profits even as more vehicles become available this fall and winter. If households hold on to cash, they can expect to face even higher MSRPs later in 2023 and 2024.
Too much money will continue to chase too few goods for a long time.
On the supply-side, White House oil and gas prices and green energy policies are classic examples of the right hand not knowing what the left hand is doing.
President Biden is pulling out all the stops to encourage more green energy — windmills and solar panels — and to boost U.S. production of solar panels and other relevant machinery to foster greater energy security.
The Inflation Reduction Act of 2022, penned by Sens. Chuck Schumer and Joe Manchin, doubles down on green policies. It contains more good than bad, but to say it will fight inflation is egregious false advertising. EVs are already scarce, and further subsidizing purchases will only serve to further exacerbate shortages, boost dealer prices and add to the cauldron of inflationary pressures from workers’ outsized expectations.
The same goes for extending pandemic subsidies for the purchase of health insurance. Those will encourage your local hospital to overcharge you even more for long wait times and terrible service at emergency rooms.
Mr. Biden’s policies have so far curtailed petroleum production and refined faster than EVs and heat pumps can come online to reduce demand for fossil fuels.
During both world wars, the federal government famously rationed foodstuffs and, during the second conflict, gasoline, shoes and other everyday items.
Due to sanctions on Russia and Moscow’s capacity to dramatically reduce Europe’s natural gas supplies and control Ukrainian Black Sea exports of grain and oil seeds, the global economy is experiencing World War-scale stress on supply chains for agricultural commodities, fertilizer, gasoline, heating fuels and petroleum feedstock for all manner of chemicals, plastics and everyday items.
Aside from a coordinated cutback in EU natural gas use, no one is suggesting sweeping wartime rationing to relieve price pressures. So, wartime shortages show up in staggering inflation, in rents, in missing items at grocery stores and at the gas pump.
Consumer product companies are aggressively raising prices — they are even willing to bear losses in market shares to lock in higher prices to support profits.
If all that constitutes a national policy to fight inflation, then you can look for me to be the next prime minister of Italy.
• Peter Morici is an economist, an emeritus business professor at the University of Maryland, and a national columnist.