Harper: Inflation matters, but only if it is understood

Despite progress over the last year, the United States economy continues to experience inflation above the Federal Reserve’s targeted rate of 2 percent. That’s a lede that’s guaranteed to bore many readers quickly, so let’s get right to why that’s important, and what needs to be understood about the current state of inflation as we begin the summer of a Presidential election year.

The lowering of the inflation rate does not bring prices down. It just means prices are going up at a slower rate. Many of us look at prices that typically swing up and down as our gauges of inflation. We’re accustomed to gas prices going up and feeling that as inflation, and coming down and feeling a bit of relief.

Some are still rooting for deflation, when all prices come down. That’s an equal and opposite problem to inflation. When people expect prices to be lower in the future, they put off their purchases and wait. Our entire economy is built on consumption and investing. If people believe there is a better deal coming, they won’t invest, and they’ll only consume what they must have and put off any discretionary purchases until prices drop.

This would stall our entire economy. Worse, those holding assets as investments – think homeowners as the prime example – would begin to lose money on their nest eggs. Look back at what happened between 2008 and 2010. Almost overnight, housing went from a “must own” investment to something no one wanted as prices entered a downward spiral.

Prices had begun to recover within a couple of years, but the market signal had already been sent loud and clear. Those who supplied new housing – from bankers to builders and developers – suddenly saw new risks and dramatically decreased supply of new homes to the market. We’re still seeing the effects of this on the supply of housing a decade and a half later.

So how does this matter with how we’re discussing inflation as we get closer to voting in November? It matters because we’re approaching this issue from a positon of economic illiteracy with those who are not only consuming the message, but from too many who are writing about it.

We’ve already covered one of the bigger problems, in that expectations are being set that success means prices will come down. This would not only mean asset prices, but wage prices too. That would be suboptimal. What we want and need are for prices to stabilize.

We then will have people claiming that the President doesn’t control inflation. The policies of Washington, for which the President usually sets the tone, absolutely determine inflation – even more than the Federal Reserve.

Inflation happens when you have too many dollars chasing too few goods. We’ve been running budget deficits consistently for the past quarter century, but since the pandemic we’ve increased spending much faster than we’ve increased incoming tax receipts – and yes, the amount of tax revenue the Federal Government is taking in is at record highs.

We don’t have a revenue problem. We have a spending problem.

This is bipartisan in its construct, and in the inaction to address it. Both sides blame the other while continuing on the same path, undeterred. Each dollar printed in Washington makes every dollar you hold worth less, and thus you need more of them to buy the same things.

A popular theme of blame I’m seeing from too many of my friends – even, if not especially among the well-educated ones – is that we can’t have an inflation problem if corporations are making record profits. This, again, projects blame onto “greedy corporations” without any understanding of the underlying facts.

Inflation hits hardest among those who don’t own things, while it either rewards or at least protects the wealth of those who do. This is why inflation must be feared in a stable society.

Inflation makes real wealth gaps even larger.

A corporation owns and sells assets or services. They produce these, sell them, and ideally keep a percentage of the sales as a return on their risk and investment. If they make 10 percent on sale, and still make 10 percent after a bout of inflation, they’re going to make record profits because the money we’re measuring with is worth less, not because the corporation is making more.

Attacking corporations for making profits is the wrong way to combat inflation. If they make less in real terms, they’re going to invest less, and thus employ fewer. That would be another version of the downward spiral similar to and with equal results of deflation. The end is a smaller economy, not a better one.

We need to beat inflation. We also need to fight the real problem, and understand what victory does and does not look like.

Victory can only be assured with a balanced federal budget. Everything else is either blame game or window dressing.