When it comes to balancing wages and prices, there is really no win at the basic level.
Americans 50 and older have seen enough that they should fully realize that inflation has reached levels not seen in four decades. Americans under 50? This is all new to them.
We thus offer a brief lesson in recent US economic history, to better understand the inflationary monster that has been freed from its cage due to the COVID-19 pandemic.
Inflation, as we hope most people know, is the percentage of increase in prices to purchase a predetermined set of goods from one year to the next.
If that collection of goods cost $1,000 in year A and $1,100 in year B, that’s an annual inflation rate of 10%.
If monthly inflation, is 3.2% (or 6.1%, 8.7%, 12.5% or whatever), it does not mean that prices are increasing by that percentage every month. It simply reflects the increase in prices for that predetermined basket of goods in that month versus the same month.
The lower the inflation rate, the better. usually.
During the 1960s, from 1960 to 1965 annual inflation was less than 2% per year. Then it started growing.
The cost of the Vietnam War was a starting factor. Then came the first “energy crisis” of 1973, when most Arab oil-producing countries withheld their supplies in anger over US support of Israel in the Middle East. By 1974, annual inflation was 11.1%. Things got a little better, but a fresh Arab oil embargo and “inflation” – an insidious mix of inflation with a slowing or shrinking economy – pushed the 1980 rate up to 13.5%.
Not surprisingly, those frustrated by the rising cost of living were demanding and often receiving higher salaries. Which pushed up the prices even more.
At the same time, the government’s “prime” interest rate—what the Federal Reserve charges banks to borrow money so that banks can loan it to others—reached a record 21.5% in 1980.
It took six years to bring down annual inflation below 2%. It jumped back to 5.4% in 1990 and 4.2% in 1991, the years before the Gulf War.
Inflation then remained below that for 30 years. So far.
As we consider June’s annual inflation rate of 9.1% – the highest since 1981 – here’s the next question: How did the inflation backfire break then?
Those 20% plus interest rates had a lot to do with it. They particularly discouraged large purchases, people and businesses having to borrow money.
Unfortunately for many Americans, this has prompted many businesses to cut wages and jobs. He bought less. Supply generally increased. Those runaway soaring prices cooled off. And businesses slowly figured they could re-hire and invest.
It is about supply and demand – not only the supply of various goods but also the supply of money to buy them.
This is a very simplified explanation. It’s not just about how much profit businesses want or need.
And we here in farmland and farm country know all too well that hailstorms, inappropriate frosts and colds, too much rain or too little can suddenly reduce food supplies and drive up grocery prices.
That is the inflationary history that young Americans did not live through. They only know an economy where prices rise slowly.
Here’s the dilemma: For at least the last 60 years, Americans have either seen wages and prices both rise sharply (from the late 1960s to the 1980s) or both move slowly (in the 1980s). from 2021, when annual inflation peaked at 4.2% (its way to June’s 9.1%).
Which will we have? Or – maybe – neither better nor worse on a nationwide level? That’s what we all get to judge.
— North Platt (Nebraska) Telegraph