Posted by William Neikirk at 3:39 pm CDT
A small group of protesters gathered in front of Union Station here recently to protest something you rarely hear about–inflation. “Did you know we are going to have hyperinflation in six months?” a young man greeted passersby with his spiel. He blamed the budget deficits and tax policies of the Bush administration. Nobody paid much attention.
And yet, we are beginning to hear more and more about the rate of inflation these days as oil and gasoline prices have suddenly surged. There is talk of $100 per barrel oil. The government’s recent price measures have shown a rise in prices for basic materials, commodities, transportation, and other goods and services.Ken Simonson, chief economist of the Associated General Contractors of America, cited “extreme price increases for a host of materials,” such as asphalt, diesel fuel, copper, plastic pipe, concrete and gypsum. Contractors have even reported shortages of cement, he said.
The Federal Reserve has been rather insouciant about the dangers of sharply rising inflation, signaling to the public recently that it is about to end its increases in interest rates. But new evidence suggests that a new round of inflation may be upon us, and the central bank may have to reassess its current thinking and keep on raising interest rates some more.
These are uneasy economic times despite strong economic growth in the first quarter of this year (nearly 5 percent). Health-care costs continue to soar. Personal debt is at an all-time high. We are running a large national budget deficit–which we could not finance were it not for the fact that the Chinese and Japanese were re-investing their dollars back in the U.S. We rely on cheap goods from abroad to keep inflation under control. We think that globalization’s deflationary trends will bail us out. But the dollar has been falling in value recently–which raises the prices of imports into the U.S.
Our social safety net–basically Social Security and Medicare–is essentially under-financed. The country has made financial promises to future retirees, but it cannot deliver without some drastic action in the next several decades. The only thing backing up these promises are Treasury IOUs now parked in the Social Security Trust Fund.
In order to redeem these future promises, taxes would have to go up sharply, government spending would have to be slashed, or the government would have to borrow more money, the latter being the potentially inflationary way out of the problem. Politicians are known for taking the easy way out, thinking that a little more borrowing is better than raising taxes of cutting big programs.
One reader wrote to me that he feared hyperinflation could come to America sooner than believed. That seems to be an extreme worry, but I think inflation can establish a toe-hold quicker than you think in our society. And once it embeds itself, it is becomes more difficult to contain. A front-page story in the New York Times today showed that inflation in Zimbabwe rose 913 percent in the past 12 months.
Some things are beyond our control (oil prices, for one) unless we change our consumption drastically. I remember the inflationary 1970s, when prices rose at annual double-digit rates. It took a tight-fisted Federal Reserve to bring them down. Interest rates went over 20 percent, and that helped bring Ronald Reagan into office. Nothing this extreme is seen now, but I remember that when former President Nixon imposed price controls in 1971, the rate of inflation was under 6 percent.
To some, a little more vigilance by our central bankers may be in order.
