Inflation is becoming worse for Americans on a fixed income

by Erik Randolph | May 10, 2023

Inflation is becoming worse for Americans on a fixed income

Today, the U.S. Bureau of Labor Statistics announced that in April the Consumer Price Index (CPI) rose by 0.4%, not seasonally adjusted. Year over year, the CPI has gone up 4.9% in the last 12 months.

The Georgia Center for Opportunity’s (GCO) take: “Not only has the federal government abandoned restoring purchasing power, they do not appear even capable of bringing inflation down to the Federal Reserve’s inflation rate target of 2%,” said Erik Randolph, GCO’s director of research. “Devaluing the dollar means that Americans must have comparable wage inflation just to keep with prices. That’s worse for Americans living on fixed incomes, the working class, and the poor.”

Year-over-year inflation rate now stands at 6.5%

by Erik Randolph | Jan 12, 2023

Year-over-year inflation rate now stands at 6.5%

Today the U.S. Bureau of Labor Statistics announced that the Consumer Price Index (CPI) dropped 0.1% in December, meaning the year-over-year inflation rate now stands at 6.5%. The Bureau also released the 2022 annual average price level, which was 8% higher than 2021.

The Georgia Center for Opportunity’s (GCO) take: “We keep seeing positive headlines about the inflation rate, but that good news is lost on average Georgians who are continually pinched on the cost for everyday necessities like groceries and gas,” said Erik Randolph, GCO’s director of research. “Although there was some positive news in the December numbers, it’s important to keep in mind that core inflation remained elevated, including for food. If policymakers in Washington truly want to help the most economically vulnerable in our country, they must return to fiscal sanity and rein in the spending. Federal Reserve Chairman Jerome Powell remains steadfastly committed to bringing down inflation, and hopefully the change of political leadership in the U.S. House will mean more responsible federal spending. The policy goal should be to repeat the general decline in prices as what happened in December so the price level slowly comes back down. This will extend the opportunity of a higher standard of living for everyone, the rich and poor alike.”

Despite the fanfare, inflation is not conquered

by Erik Randolph | Oct 17, 2022

Despite the fanfare, inflation is not conquered

Key Points

September CPI numbers show inflation is still on the rise.
Core inflation hit a 40 year high.
Local communities are the key to paving the way for economic success.

In September, President Joe Biden prematurely declared victory over inflation as he held a celebration event over the party-line passage of the Inflation Reduction Act that required the Vice President of the United States to cast the deciding vote in the Senate.

Perhaps they were fooled by the Consumer Price Index (CPI) numbers for July and August. In July, the CPI dropped just a tiny bit to 295.271 from the seasonally-adjusted index of 295.328 for June, which rounds to an inflation rate of 0.0%. Although the unadjusted index slightly decreased again in August, the seasonal adjusted number rose by only 0.1% that calculates to 1.4% when annualized.

But, alas, inflation rates typically fluctuate from month to month, and what’s important is the longer-term trend.

When the U.S. Bureau of Labor Statistics released the CPI numbers for September, it became all too clear that we must continue to suffer through rising prices — because inflation has not yet been tamed.

The overall monthly inflation rate rose 0.4% when seasonally adjusted, that is 4.7% when annualized. Yet again, the inflation reading came in hotter than expected, with consensus estimates being around 0.3% for the September reading. The year-over-year inflation rate stands at 8.3%.

Worse, inflation has become ingrained in our economy with no indication that it’s going away anytime soon. Here are a few reasons why we still need to be worried.

1.The core inflation rate hit a 40 year high

The reason economists look at the core inflation rate is to gauge how widely inflation has spread throughout the economy. They get the rate by subtracting the cost of energy and food from the index, but not because energy and food prices are unimportant. But because of their volatility.

The core inflation rate was 6.7% in September over the previous year – the highest it’s been in forty years. It increased 0.6% in September, which calculates to an annual rate of 7.1%. This alarming trend demonstrates just how ingrained inflation has become in our economy.

“But policy is only one piece of the puzzle. The other even more important piece is the community-level response.”

2. Energy prices are down — sort of — but food prices up

One piece of good news is that energy prices went down in September. However, this is of little consolation because the prices are still 19.9% higher than last year and 49.7% higher than two years ago.

There is no good news for food prices. You can’t go to the grocery store anymore without noticing the impact of inflation, and the CPI numbers bear this out. Food prices in general are up 11.2% over last year, or 16.3% higher than two years ago. As anyone can tell you, this is just the general price increase. Consumers can experience higher prices depending on what foods they buy. Cereals and bakery goods are up 16.2% from last year, and dairy products are up 15.9%

Although economists like focusing on core inflation, energy and food prices are necessities that impact most people, especially lower income families and seniors living on fixed incomes.

3. Inflation isn’t going away anytime soon

When reading the tea leaves, there aren’t many indications to expect inflation will abate any time soon. The recent droughts and man-made obstacles to food production, such as Russia’s war on the Ukraine and the irresponsible farm policy changes in the Netherlands, will impact food supply, which, of course, will have a direct impact on food prices and its availability.

As winter approaches the northern hemisphere, the demand for energy will increase. Here again, the war in Ukraine is culpable for disrupting energy supply to Europe. Moreover, not only did the Biden Administration fail to convince OPEC to increase production, but OPEC, which by the way includes Russia, is doing the exact opposite. They are cutting back on oil production.

In the meantime, current U.S. energy policy is more concerned about climate change than energy independence — that we were just two short years ago. The Administration’s release of petroleum from the Strategic Petroleum Reserve did help ease prices, but now the reserve is at the lowest level since 1984. How much lower will the Administration allow it to go?

Because it impacts economic behavior, core inflation is even harder to solve. People – whether acting on behalf of their businesses or as an employee or as a consumer – incorporate their expectations of higher prices into their personal actions. This only fuels inflation more. Consider this fact: Although many businesses are experiencing higher revenue, their costs are also up. Importantly, and unfortunately, for many of them, their profits are down. All these factors exacerbate inflation while slowing economic growth, which harms everyone.

The way forward is through local communities

Our nation’s inflationary environment is bad. Everyone knows that. The big question is what to do about it. On the policy front, we need a paradigm shift in Washington, D.C., to focus on enacting policies that encourage private investment, savings, and free trade while cutting back on deficit spending.

But policy is only one piece of the puzzle. The other even more important piece is the community-level response.

Here at the Georgia Center for Opportunity, our focus is primarily on these bottom-up solutions. Our neighbors — particularly those on the economic margins — are suffering from high inflation and need help. That’s where programs like BETTER WORK come in. They help the poor and impoverished get the skills and training needed to find a job and pursue a career, while ensuring they also find safe and affordable housing, reliable transportation, childcare services, and any other essential that’s needed.

We also know that economic prosperity is challenging when your home life is in shambles. That’s why GCO prioritizes healthy family relationships through our Elevate workshops throughout the community and our Strengthen Families Program in local schools. On that note, prosperity is impossible without a good education, so we prioritize policies that will bring the broadest range of educational options to the most people, regardless of their background, income level, or zip code.

The way back from our high inflationary environment is going to be a long trip. But with the right policies in place and with an attitude that prioritizes on-the-ground help for our neighbors, we can lighten the burden for our neighbors during the journey.

Inflation is still raging. Biden’s student loan forgiveness plan will only make it worse

by Erik Randolph | Oct 5, 2022

Inflation is still raging. Biden’s student loan forgiveness plan will only make it worse

Key Points

Year-over-year inflation rate remains high at 8.3%. While the latest monthly number, and the CPI reading from July, show that inflation has stalled, we’re not out of the woods yet.
Reducing fiscal revenue by suspending the loan repayments adds to federal fiscal deficits.
Labor market moral hazards will worsen the situation of students achieving meaningful education and solving the problem of their skills not matching what is needed in the labor market.

In September, the U.S. Bureau of Labor Statistics announced that the Consumer Price Index (CPI) rose 0.1% in August. However, the year-over-year inflation rate remains high at 8.3%. While the latest monthly number, and the CPI reading from July, show that inflation has stalled, we’re not out of the woods yet.

There are warning signals, including worldwide drought and continued energy disruptions, that inflation is not yet tamed. Moreover, Federal Reserve policy is refusing to allow the price level to come back down, meaning that most households will continue to contend with higher prices and lagging income growth.

Meanwhile, the administration in Washington is taking steps that will only worsen the inflationary environment by its fiscal policy that relies on overspending absent adequate revenue. An unexpected part of this is President Biden’s new plan to forgive up to $20,000 in student loans for households making up to $250,000 a year.

We’ve already written about how this policy will end up hurting the poor and working class. But from a strictly economic perspective, the blanket student loan forgiveness action by the president raises two additional fundamental concerns.

Deficit spending

Reducing fiscal revenue by suspending the loan repayments adds to federal fiscal deficits. Currently, the federal government is not running surpluses with a manageable national debt as if the federal government is in a financial position to be generous. The government itself is in a financial straitjacket where it must continue to borrow to pay for its expenses, and the interest payments on the national debt continues to grow not just from the additional borrowing but also from rising interest rates. Like a family with a large and growing minimum payment on credit card debt, it is crowding out other budget priorities.

Although no economist knows how much more debt the U.S. economy can withstand, there is widespread agreement among them across the political spectrum that worsening deficit spending only aggravates inflationary pressures. We may say that taxpayers will eventually pay for the loan forgiveness, but the reality may be that we will pay for it sooner with higher inflation.

Paying through inflation rather than taxes is regressive, impacting lower income Americans the most. Consider the Tax Policy Center estimate that 57% of households paid no federal income taxes in 2021 with many receiving a net gain instead. The Tax Policy Center expects that the percent of non-paying households will drop to about 40% over the next few years, consistent with pre-pandemic levels. Why is this important? Because it shows how an inflationary policy, instead of a fiscally sound policy, impacts low-income Americans worse.

Labor market moral hazards

Second, it presents moral hazards that will worsen the situation of students achieving meaningful education and solving the problem of their skills not matching what is needed in the labor market.

The moral hazards will come about because given the history of entitlements in this country, once we begin on the path of creating a new entitlement, it opens the door for expanding that entitlement. Are not other students just as deserving of having their debt paid for now and in the future? And what about the past? Why not raise the thresholds so even more debt can be forgiven? What we’re creating here is an entitlement that has moral hazards. Even the expectation of future loan forgiveness will cause behavioral changes with the same moral hazards.

The first hazard is with the students themselves. Choosing a career and what to study is a major life decision where one must weigh the benefits and costs. Already we have a problem with many students making bad decisions and studying things that will not help them develop the skills they need in finding good paying jobs. Installing a system where the cost of education is now paid for with other people’s money will give them yet another reason to rationalize their poor education decisions. While the debt of that education may be forgiven, the opportunity costs will be unforgiving because you can’t turn back the clock and erase the consequences of those bad decisions.
The second hazard is with the post-secondary educational establishments themselves. Government involvement with guaranteed student loans already exacerbates the outrageous tuition price hikes we’ve witnessed over the past 50 years. Having the government now forgiving student debt will only reduce the financial incentives for higher education to rein in its exorbitant costs.
Finally, where are the incentives for institutions of higher learning to adjust their content to match the needs of society and the economy? As the incentives are eroding for students to carefully choose what to study and for the educational institutions to rein in their costs, the arrangement provides yet another reason for academia to justify the assortment of degrees they offer and the courses they teach. Already we are witnessing a disconnect between the content of what students have studied with what they will need to be successful in their careers.These students typically learn this hard lesson once they graduate and are faced with the realities of life. This flaw in the education system is a contributing cause of the great mismatch between what skills and education people have and the skills needed by employers that fuels the economy. Our economy is currently suffering from this problem, which now will only grow worse.

A glimmer of good economic news? Maybe not

by Erik Randolph | Aug 17, 2022

A glimmer of good economic news? Maybe not

Key Points

As of June, 35 states and D.C. have not recovered the number of lost jobs
The labor force has shrunk despite population growth.
Its stated goal of the Federal Reserve remains the same–to reduce inflation to its 2% target, meaning it will take steps to prevent the price level from coming back down. This bad policy goal will burden the working class and the poor and retired persons the most.

It may not matter if federal policy does not change.

We’ve seen some back-to-back encouraging news within the last few weeks. The Employment Situation Report for July showed that the United States finally recovered the number of its lost jobs from the start of the pandemic, and the Consumer Price Index (CPI) inflation rate for July was essentially zero. But digging a little deeper to put the news into perspective reveals real concerns that stagflation will not end anytime soon.

The States Who Are Driving the Job Recovery

On the jobs front, yes, it’s true we’ve recovered the number of lost jobs benchmarked to February 2020 before the drastic impact on the labor market from COVID-19. This indicates we’re on the mend, but the job recovery process has not been the “V” shape hoped for at the beginning of the pandemic, one that would have meant a robust job recovery.

Two-and-a-half years later, the civilian non-institutionalized population base that feeds the labor force grew by 4.8 million. Our own ARIMA Model job forecast shows we are approximately 5.8 million jobs short of where we would have been had the pandemic not happened.

But this is not the case for all 50 states. Astoundingly, four states—Montana, Utah, Idaho, and Wyoming—have matched or nearly matched their pre-pandemic ARIMA Model forecasts, effectively eliminating any impact from the pandemic on the number of lost jobs.

In the meantime, the national job recovery to pre-pandemic levels is driven probably by just 15 states who already recovered their number of lost jobs prior to the nation as a whole. These states are Utah, Idaho, Texas, Montana, North Carolina, Georgia, Florida, Tennessee, Arizona, South Dakota, Colorado, Arkansas, Indiana, and Nevada.

As of June, the remaining 35 states and D.C. have not recovered the number of lost jobs. We have to wait another week before we know whether another state slipped onto the list of leading states that helped tip the balance for the national July data.

According to our analysis, a common feature of the leading states is that they tend to have policies that value economic freedom more than the other states do. Incidentally, and for explanatory reasons and not for the purpose of getting political, all but three of the 15 leading states have given political control to the governor’s office and both chambers of the state legislature to the Republican Party.

Jobs Versus People Employed

One problem with job data is that the dataset allows for double counting. If we want to count the number of people employed, it paints a different picture.

The Current Population Survey shows the U.S. is still more than half a million workers short when compared to February 2020. In fact, we had fewer employed persons in July than March of this year, using seasonally adjusted data.

The reason is that the labor force has shrunk despite population growth. This can be seen with the 62.1% labor force participation rate that is more than a percentage point below where it stood in February 2020.

This means that the 3.5% unemployment rate—which now matches its pre-pandemic level—is misleading. The shrinkage of the labor force is distorting the meaning of the metric.

Taken together on a national scale, jobs have recovered but the number of employed persons has not. This can mean only one thing. More people are working multiple jobs to make ends meet.

Inflation versus the Price Level

July’s CPI ever-so-slightly decreased. It ticked down 0.2% at an annualized rate–a welcome change from the past 25 months. Just to keep this in perspective, the price level nonetheless increased 14.1% since the start of the pandemic. But there is no need to tell this to average consumers who have been feeling it in their pocketbooks.

Disturbingly, the Federal Reserve shows no interest in doing something about the elevated price level–and who isn’t even discussing it. Its stated goal remains the same–to reduce inflation to its 2% target, meaning it will take steps to prevent the price level from coming back down. This bad policy goal will burden the working class and the poor and retired persons the most.

“Disturbingly, the Federal Reserve shows no interest in doing something about the elevated price level–and who isn’t even discussing it. Its stated goal remains the same–to reduce inflation to its 2% target, meaning it will take steps to prevent the price level from coming back down. This bad policy goal will burden the working class and the poor and retired persons the most.”

Fiscal and Regulatory Policy

The Federal Reserve does not stand alone with its bad policy. Congress and the Administration are just as guilty, if not more so.

Excessive fiscal spending also drives up the price level. Worse, increasing business taxes will pull resources from businesses. These resources are needed to produce goods and services that we all use and enjoy. It also enables these very same businesses to pay workers and compensate investors, and it leads to more economic growth and prosperity. Likewise, more excessive regulatory restrictions have similar negative effects on people and the economy.

Increasing business taxes and regulating businesses even more at this time will not help keep prices down. Rather, a good portion of these higher costs will be passed onto consumers. And they will be passed on to consumers to the degree that individual businesses are able to do so. If businesses can’t pass all or even some of those costs on to consumers, then they will be forced to make more difficult decisions, such as cutting back on the number of employees or suspending pay raises to employees. Profits will clearly suffer that may cause a few businesses to scale back or exit the industry altogether. These consequential actions all aggravate stagnation. Add in the price increases and we get more stagflation, not less.

Unfortunately, the President just signed into law the erroneously named Inflation Reduction Act that will do nothing about inflation, but it will hike business taxes and increase regulations that will only worsen the economic situation.

Congress and the Administration need to start following the lead from the states who are doing it right. Only pro- growth policies relying on innovation and production organically sprouted from within the economy will help us out of this mess, and it won’t work if politicians think that means taking money from successful businesses or imposing new mandates on others or picking the winners and losers in the economy.