James Galbraith: The Quasi-Inflation of 2021-2022 – A Case of Bad Analysis and Worse Response

Yves here. Galbraith reviews conventional pictures of inflation, the profile of our current episode, and how it clear did not result from Covid “stimulus” related spending. This piece does a good job of making theory accessible and explaining how it applies to recent conditions. However, readers may quibble with Galbraith not including food shortages (avian flu, supply chain interruptions, some poor harvests) in his list of inflation drivers.

By James K. Galbraith holds the Lloyd M. Bentsen jr. Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs, and a Professorship in Government at The University of Texas at Austin. This essay is forthcoming in the Review of Keynesian Economics and is posted here with the permission of the editor. Contact: galbraith@mail.utexas.edu. Originally published at the Institute for New Economic Thinking website

1. Introduction

The word “unemployment” has a precise technical meaning, with origins in the industrial economy of post-Civil War Massachusetts (Card 2011); to be unemployed is to be seeking paid work but unable to find it at the prevailing wage. The concept was developed for administrative purposes at particular stages of capitalist development; it has legal and social-welfare implications, and the word is not applicable in other settings, such as peasant-agrarian or informal economies.

Though often juxtaposed with unemployment, the word “inflation” has a different ontological foundation. It is a theoretical term that has been bowdlerized in popular discourse, to the point where two distinguished advisers to President Biden recently advanced this prosaic definition: “the rate of change in prices over time.” (Bernstein and Tedeschi 2021). So, it is necessary to distinguish between usages. We might call these “pure inflation” and “everyday inflation.”

2. Pure and Everyday I nflation

Pure inflation is the theoretical concept. It may be defined as the undifferentiated devaluation of the monetary unit in relation to all goods and services in the economy, on a continuing or sustained basis. This is the type known to acolytes of Milton Friedman as being “always and everywhere a monetary phenomenon.” (Henderson 2021) It is rarely (if ever) encountered in real life. Possibly in 16th-century Europe the influx of silver and gold from the Americas and their effect on the value of metallic monetary units then in use provides an approximate example. The modern hyperinflations and currency collapses of (among others) Germany and Zimbabwe conventionally fall into the same category, even though these undoubtedly had differential effects on exports, imports, and non-tradables. But by contrast, a single once-for-all devaluation (say, Mexico 1995) would not count, if the national money then stabilized, and the price shock passed through the domestic economy within a limited time.

The opposite case, everyday inflation, is of a once-for-all increase in the price of a core commodity – a price shock, typically in energy – that propagates through the general price structure in rough alignment with the factor-intensity of that commodity in different sectors. In the cases of oil and natural gas, direct derivatives such as fertilizer, plastics, and transportation would be hit hard, more remote sectors (such as housing and services) less so. In this case, an increase in the general price level is always observed, because almost all prices of produced goods and services, and especially wages, are sticky downward, so there is never a full offset of increased prices in one sector by decreases in another. However, the net effect is always a shift in the distribution of incomes toward the sectors experiencing the largest price and profit gains, which is why inflation of this type cannot be qualified as “pure.” Further, the shock to the general price level usually dissipates after a certain interval – perhaps normally a few months. It may persist in the data and headlines for longer, as discussed below.

Having identified the two polar cases, “pure” and “everyday” inflation, we may admit the possibility of an intermediate case. This could be called “hybrid” or “persistent everyday” inflation. It would be marked by a sequence of knock-on or ratchet effects (Wood 1978), in which relative price impulses are passed from one sector to another without major damping. A structure of staggered wage contracts across different powerful trade unions could have this quality, with wage and then price increases ricocheting from one industrial sector or public service to the next. The US and UK inflations of the 1950s through the 1970s were more-than-possibly of this type.

With this typology in mind, the US price increases of 2021-2022 were certainly an everyday inflation. There was no collapse of the US dollar on international markets, nor any general, undifferentiated increase of all prices. There was also no long-term reverberation of cost pressures from one sector to the next, and no evidence of an ongoing wage-wage spiral. What did happen, was a series of cost-shocks related to the pandemic and its aftermath, briefly exacerbated by the sudden escalation in early 2022 of the Ukraine war, which began to fade from the data over the second half of 2022.

3. Sources of Everyday Inflation in 2021 and 2022

The most important cost shock was in the energy sector, and specifically oil. With the onset of the pandemic, sales, production, exploration, and pricing in the domestic US oil sector all declined sharply. This created a low base for the recovery of oil prices in 2021 and into 2022, hence a large hit to the rate of change when recovery occurred. The shock also meant that oil properties, notably in the Permian Basin, were temporarily cheap. Private equity moved in, stating openly to the local press that their objective would be to increase the rate-of-return and “shareholder value” – rather than maximum levels of production or economic growth. A typical report in the Houston Chronicle reads:

Investors in oil and gas companies, however, have been pushing for ‘capital discipline’ and increased returns. The result is, instead of spending to quickly ramp up production in oil fields such as the Permian, companies are sticking to already planned production increases — providing only modest relief to tight supplies and high prices while passing on a good chunk of their blockbuster profits to investors. (Buckley 2022)

The price of oil had fluctuated in a range roughly from $65 to $80 per barrel (WTI, adjusted for inflation) in the years just before the pandemic. It took a spectacular dive to just $20/bbl in early 2020, recovered to its pre-pandemic levels, and then briefly spiked to around $116/bbl in early 2022 before again returning to $80.55 in November 2022. In inflation-adjusted terms, the price of oil never reached levels prevailing as recently as 2014 (FRED 2022), yet from the low base of early 2020 the rate of change, and therefore the contribution of derivative fuels to the change in the consumer price index, was dramatic. It was, however, finished by June 2022, with price deflation setting in thereafter. In the interim, oil prices drove the gasoline component of the Consumer Price Index up by 154 percent from the low in March 2020 to the peak in June 2022, with indirect effects on food and all other sectors.

A second cost shock affected automobiles. Here the culprit was a shortage of semiconductors, necessary for new cars. In the early days of the pandemic, with a sharp decline in commuting, major semiconductor producers bet on a shift of demand toward electronic appliances and household equipment, which did not occur. New car production was therefore well short of demand as 2021 came around. The effect on new car prices was modest, as the main effect in that market was backlogs and queues. However, demand was displaced onto used cars, which exist in fixed supply and sell for what the market will bear. Used car prices rose 55 percent to a peak in February 2022.

A third significant (though smaller, and considerably later) price increase occurred in the housing component of the CPI, which accounts for about thirty percent of the index. In this component, actual rents largely stand in for the cost of housing; the idea is that a shift from rental to ownership of a house should not affect its contribution to measured output. In practice, the imputation is problematic. Rental markets are lower income, lower quality, and higher turnover than sale markets, and the price of new rentals is more volatile than rents under long-term contracts, which are in turn more volatile than the actual cost of maintaining a home owned outright or with a fixed mortgage.

Thus, it is possible that an increasing price of new rental contracts may have an amplified effect on “imputed rents” — which homeowners are calculated as paying to themselves — while having little material effect on the actual housing costs of most American homeowners. The housing component of the price index accelerated from the summer of 2021 through the fall of 2022, at which point it too began to subside. In any event, as with used cars, the sale or rental of existing homes is an internal transfer, with equal gains and losses on either side of the transaction. It is not a relationship between “consumers” and “producers” of a good or service. It is not clear why this component should figure heavily, or at all, in policy decisions over “inflation.”

The issue of persistence is blurred by transmission effects from the wholesale to the retail levels. While oil prices had recovered just to previously normal values by March 2021 (and only thereafter spiked briefly in March 2022), gasoline prices, which figure directly in the CPI, continued to rise until a peak in June 2022. Is this “persistence” – or is it merely a lagged effect, as retailers sell off inventories acquired at lower prices and replace them with new products at higher prices?

For the overall price level, there was a further, fateful, illusion of persistence. The Bureau of Labor Statistics reports the change in the CPI on a 12-month basis, evidently to avoid the flux endemic to a monthly survey. This practice has the consequence of generating eleven additional headlines after any one-month shock to the price level, each of which may contain no new information whatever. Such news stories (and associated opinion pieces) continued through the mid-term elections of 2022. By then, repetition had done its job; the course of policy was set. Afterward, it became clear that there was no persistence of price pressures in the US economy (Smith and Duguid 2022), and that an evident turning point had already been reached by mid-summer.

4. The Phillips Curve, the NAIRU, and Inflation Targeting

Prominent economists – Lawrence Summers (2021), Jason Furman (2022) – were quick to fix the blame for the rising prices of 2021 and 2022 on macroeconomic policy, and specifically fiscal policy, while others – Kenneth Rogoff (2022), Alan Blinder (2022) – placed the spotlight (if not the blame) on the allegedly over-expansionary (or insufficiently reactive) policies of the Federal Reserve. Although their interpretations differ in some respects, these views are all rooted in the history, as they saw it, of the inflation of the 1970s, and in the models common to that era.

We may distinguish perhaps three variants of this macroeconomic view. The first adverts to the Phillips Curve (Samuelson and Solow 1960), which hypothesized, from limited observation and bold conjecture, a stable tradeoff between unemployment and inflation rates. The Phillips conjecture gained credibility from rising prices and falling jobless rates through the 1960s in the United States, but failed to correspond to the facts thereafter, and never did in most other industrial countries.

A second variant emerged at the hands of Milton Friedman (1968) and Edmund Phelps (1967); they introduced a hypothetical called “inflation expectations” and showed that incorporating that concept into a Phillips equation would generate a near-vertical long-run relationship between inflation and unemployment. Thus emerged the “natural rate” or “non-accelerating inflation rate” of unemployment (NAIRU). By the lights of this model, attempts to reduce unemployment (below its “natural” value) with demand stimulus could lead to ever-accelerating inflation. In a theoretically-consequential but empirically-nonexistent gloss, Robert Lucas (1972) and others modified the expectations idea (from “adaptive” to “rational”) to produce a strictly-vertical inflation/unemployment relationship and the “hyper-neutrality” of money. By dint of logic and in the face of the collapse of the original Samuelson-Solow formulation, Friedman-Phelps-Lucas underpinned a new orthodoxy, according to which central banks should only target the inflation rate and leave unemployment to the “labor market.”

Exactly how the central bank should target the inflation rate is an awkward question to which no clear answer exists. The original counter-Keynesian (monetarist) view held that the central bank could and should target the growth of the money supply. Application of this idea from 1979 to 1982 came with the cost of a massive slump and global debt crisis; in the aftermath, the practice of money growth targets was abandoned. Since then, Federal Reserve policy combines targeting of short-term interest rates with public statements on desired inflation; the effectiveness of this strategy was never tested in the forty years after Volcker dumped monetarism, as there was no inflation to test it on. Nor (despite residual monetarist fears) did “quantitative easing” in the 2000s bring inflation back. As Hyman Minsky observed (Marselli 1993), banks do not lend reserves and they do not need reserves in order to lend.

By 2018, the evidence against the natural rate/NAIRU hypothesis was strong enough for Olivier Blanchard (2018) to raise some tentative questions and to suggest that economists might “keep an open mind and put some weight on the alternatives.” There is no sign that this wise advice took hold.[1]

5. The Output-Gap Model

With the demise of the original Phillips Curve, some mainstream economists who were unwilling to give up a stabilizing role for macroeconomic policy retreated to a rough-and-ready calculation of “economic slack” – the estimated difference between actual output and its “potential” value. The latter could be calculated by projecting forward, from the preceding peak, the growth rate of real Gross Domestic Product before the downturn. The underlying thinking was that so long as fiscal stimulus was limited to an amount estimated to be sufficient to close the actual-to-potential output gap, inflation risks were minor and could be disregarded. This view became highly influential in setting fiscal policy.

The output-gap model lends support to the leading pseudo-Keynesian prescription in the face of recessions, namely tax cuts for households and business firms combined with direct cash transfers to households. These measures, universally described as “stimulus,” were thought to be the fast-acting solutions; fresh money in private hands would be quickly spent, bringing on the most rapid recovery and return to high employment. Direct spending – public works and jobs programs – would operate directly on GDP (as tax cuts and bonus checks do not) and with larger multiplier effects. But – the argument generally went – they could not be mobilized so quickly, when it mattered most. They would thus risk coming onstream just as the economic recovery was complete, and so adding, counterproductively, to renewed inflation.

While the output-gap approach was (and to many economists still is) intuitively appealing, it rests on several unstated assumptions. The first is that slumps are mainly driven by cycles in effective demand, whether for consumption goods, business investment, or exports – and not by changes in the material conditions underpinning production. A decline in resource quality, an increase in resource costs, institutional failures, or a technological shift rendering accumulated physical capital obsolete – these matters would preclude any early return to the previous production peaks, and render calculations based on those peaks irrelevant to the post-slump conditions. Second, even if the calculation is correct when first made, any failure to return rapidly to the previous peak production entails the decay of existing capital, so that the potential dips toward the actual as time passes. If these possibilities are acknowledged, the output-gap calculation would appear to leave even less room for a non-inflationary pseudo-Keynesian stimulus policy.

Further, the amount that seemed desirable would depend also on the rate at which growth was forecast to resume in the absence of a stimulus policy. Since standard models build in a reversion to the previous equilibrium path, quoi que vienne, an optimistic forecast militates for cautious estimates of how much “stimulus” to enact. In 2009, caution prevailed, with a “targeted and temporary” expansion program including a large tax-cut component. It proved seriously insufficient. In 2020 and 2021, very much larger and more sweeping emergency programs evoked expressions of concern from leading figures of the Obama era; Summers (2021) in particular warned that it could set off an accelerating inflation as households rushed to spend their income gains.

There is, however, a factor that cuts in the opposite direction – as indeed Milton Friedman (1957) once implied, in advancing the “permanent income hypothesis” for which he was awarded the economists’ Nobel prize. Friedman argued that, past a certain point, a large transfer of purchasing power to households may affect balance sheets rather than behavior. In that case, the consequences of fiscal stimulus would be largely limited to the preservation of previous spending patterns; any additional transfers would merely be stored away, partly as a hedge against future ill fortune. Curiously, though he had expressed admiration for Friedman on points on which he was wrong (Summers 2006), Summers did not (so far as I’ve seen) refer to the permanent income hypothesis in the debates of 2021, although it proved in this instance to be a decent guide to actual events.

6. US Household Behavior in Slump and Stimulus

The United States had a poor and badly organized public health response to the onset of the Covid-19 pandemic, with a rapid spread of the virus and a chilling death toll, albeit heavily weighted toward the elderly, immunocompromised, and otherwise at-risk parts of the population. However, the economic response was rapid and administratively efficient, providing a cash transfer through the tax system and a very substantial extended unemployment benefit, which, at $600 per week initially, represented a raise for a large segment of the working population. For this reason, despite a spectacular collapse in employment and working incomes, there was little-to-no increase in poverty and certain indicators of well-being, such as food insecurity, actually declined (Schanzenbach 2022).

What did households do with the money? For the vast majority, laid-off from low-to-moderate-wage service jobs, the best answer (Peterson Foundation 2021) appears to be that they kept up with their ordinary, fixed, and customary expenses: rent, utilities, groceries, gasoline, education. They did not splurge, but for these households, there was only a modest increase in savings. For households in the upper tiers of the distribution, the picture is different. They had previously spent heavily on the services that employed the large majority of American workers; they were less likely to become unemployed and the assistance was a less-important share of their incomes. But they were cut off from the ordinary use of their earnings. So they saved what they could not spend, and aggregate savings rose temporarily to about one-third of aggregate income. These savings then found their way into asset markets: real estate, corporate equities, collectibles, and the like, with purchases abetted by extremely low long-term interest rates. Asset prices, accordingly, recovered quickly and rose sharply as the pandemic wore on.

None of this supports the notion of an inflationary spending spree fed by a reckless “stimulus” policy. There was, to a degree, a shift of purchasing power, blocked from services, into household appliances, vehicles, home renovations, and new construction. But (as institutionalist theory would predict) the result of this shift toward newly-produced goods was (mainly) backlogs and queues and shortages rather than price increases, and in many cases the backlogs were of imports, leading to epic congestion in the container ports of the US West Coast (USDOT 2022). Price effects were (again, as theory would expect) stronger in asset markets. As stated above, these are not markets for produced goods and therefore not normally considered to be elements of inflation, even if they do appear in some components of the Consumer Price Index. On the contrary, the usual word for a general increase in asset prices is “boom.” And booms, as history shows, are deeply vulnerable to increased interest rates.

In brief summary: The price increases of 2021-2022 were cost-driven, accompanied by an asset price boom incident to the disruption of the service economy. They were not driven by macroeconomic excess, neither fiscal nor monetary. But they did hand the Federal Reserve a political problem, which it proceeded to solve, in what may prove to be the worst way.

7. The Fed Waves Its Wand

According to President Biden (Irwin 2022) and to the large consensus of mainstream economists and the voices of the financial sector, the “inflation” problem of 2021-2022 fell within the responsibility of the Federal Reserve. This was convenient for each player in the drama. For the President, it meant that political responsibility for price increases and (worse) for the consequences of dealing with it could be shuffled off onto an impregnable institution outside his control. For the banks, vested through quantitative easing with vast excess reserves, it would mean earnings without risk or effort, since the Federal Reserve pays interest on reserves at the official rate. For the economists and central bankers, it would mean vindication of their long-held beliefs and a boost to their perceived influence. The costs would fall elsewhere – on other countries and their banks, on speculative markets, on homebuilders and homeowners, on the indebted, and, eventually although not necessarily soon, on businesses and the presently employed.

The Federal Reserve therefore acted. Interest rates rose in large tranches from early 2022 through the late fall. Higher interest rates quickly quelled the housing market, while supporting the dollar and therefore keeping a lid on the price of imports. Stocks, especially in the technology sector, and cryptocurrencies fell in value. By raising interest rates aggressively, the Federal Reserve also received credit for an end to price increases in core commodities that would have stopped rising in any event, especially after the administration started selling petroleum from the Strategic Reserve and oil prices were brought back down. The fact that absolutely no prior theory or evidence supports the notion that tight monetary policies can end inflation within just a few months was, in the main, conveniently overlooked (Galbraith 2022b). The Federal Reserve is a very lucky institution.

However, there is a fly in the soup. It is the relationship between the short-term interest rate, which the Federal Reserve controls, and the longer-term rates, on Treasury bonds and in the private sector, over which the central bank exercises very little immediate influence. Long-term rates, for a safe asset like Treasury bonds, are a compound of current short-term rates and the expected future course of short-term rates over the lifetime of the bond. This second element has been conditioned (very reasonably) for years to expect very low short-term rates, and thus to view a rise in rates as a temporary aberration, likely to be reversed once the economy falls into a deep enough slump. The result is that the yield curve, normally upward-sloping, is now inverted. There is therefore no reason for any investor to buy or hold a long-term security – the short-term assets are not only safer, but also a better deal.

This is why an inverted yield curve is almost always followed by a slump in business investment, home construction, housing prices (and therefore the viability of mortgages), and of course in stocks and bond markets (Galbraith, Giovannoni and Russo 2007). At present writing, many observers can see the coming storm. But the Federal Reserve is stuck. If it relaxes policy, it will appear over-sensitive to economic risks, inconstant, and non-credible. If it continues down the present path, it is steering economic activity toward a cliff. Again, not necessarily soon. But in due course, and inevitably – opening the door to another financial crisis and yet another round of crisis interventions.

In this climate, at present writing, the Federal Reserve’s leadership has shown its colors and commitments (Galbraith 2022a). The interests of the dollar and the US banking sector in world competition are paramount. So far as the domestic political economy is concerned, the priority is primarily toward ensuring that wages never catch up to the price increases that have already occurred. In recent speeches (Cohan 2022), Chairman Powell has made this commitment abundantly clear – and even the fact that wage growth has slowed in recent months seems to be making little impression on the course of policy. Unemployment must rise, labor markets must soften, capital must gain, and workers must lose. That is where matters presently stand.

8. The Prospect for Prices

The most likely course of events is therefore a renewed slump and a further shock to employment and wages. Apart from construction, however, this may not happen soon; contrary to commonly expressed liberal worries (Olander, 2022), the next big one may not yet be in sight. Businesses and households have a way of trying to survive, when conditions begin to get worse, by taking on new debts even on unfavorable terms. Lenders usually find such deals attractive; they bring good returns and the assets, such as they are, can often be securitized and fobbed off on the unwary. This can continue until it stops.

And so, it also remains possible that the crisis of prices, such as it was, may not have run its course. There are three reasons to fear additional problems on the cost front in the period ahead.

First, there is a problem of gross markups. In normal times, with general price stability, these are stabilized by convention and habit, by the economic equivalent of good manners. Businesses are cautious about antagonizing their customers; they do not like to acquire the reputation of a price gouger. (This is why, for instance, hardware stores do not generally jack up the price of plywood when a hurricane is on the way). But in a general melee, with prices going up all around, a different mentality sets in, an impulse to grab what one can, and not be the sucker left behind. An inflation driven by profits (Bivens 2022), not wages, can therefore reverberate for some time. Unlike a wage spiral, a profit spiral gets little media attention and policy response – for obvious reasons.

Second, there is a risk of more shocks to core commodities, especially in the energy sector. Oil prices came down in 2022 thanks to sales from a finite strategic reserve. Now with the mid-term election past, the administration plans to buy oil from the market to replenish the stock (White House 2022). Will production suffice to cover both regular demand and storage? So far as known, no one really knows; both the geology and the strategy of the producing firms and refiners are uncertain. But energy markets are financialized, and there is in them the capacity for speculative manipulation – what I have called the choke-chain effect (Galbraith 2014). We shall see whether we are in for another round of that.

Third, there is the effect of higher interest rates on business costs. Interest, after all, must be paid. Sooner or later, the higher short-term rates will bleed into the accounts of business borrowers, and some of the effect will be passed along, so far as conditions permit, to their customers. To that degree, a tight monetary policy is inflationary before it is disinflationary.

9. Conclusion

In sum, the theoretical construct of pure inflation is of no use in understanding the price events of 2021 and 2022 in the United States. By extension, the conventional tools of the Phillips Curve, NAIRU, potential output, and money-supply growth are equally useless. By further extension, the “anti-inflation” policies of the Federal Reserve have acted on asset markets (which are not part of theoretical inflation) while taking credit for the end to a price process in produced goods that was transitory in any event. Yet the Federal Reserve is now stuck in a posture guaranteed to destabilize economic activity sooner or later, while the economy remains vulnerable to additional potential price shocks emanating from the same sources already seen, including real resources, supply chains, wars, pandemics, and the policies of the Federal Reserve itself. These can be dealt with, if at all, only by policies in each specific area (Weber 2021). And that, by the way, was very much part of the thinking of John Maynard Keynes (1940) on this topic in How to Pay for the War, along with the practice of his partial disciple, John Kenneth Galbraith (1952), at the Office of Price Administration in 1942-1943.


[1] Blanchard did not cite an article in the same journal twenty-one years previously, titled with less equivocation: “Time to Ditch the NAIRU” (Galbraith 1997).

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  1. Wukchumni

    I was a teenager during the 1970’s inflation in a time when ‘connectivity’ meant you had a phone line, so news traveled at a snail’s pace almost, nobody knew nothing. It was also a time when to change a product size was a monumental task, versus now when we get ‘bi-flation’ which entails shrinkflation combined with inflation, less product for more money.

    The thing i’m seeing is the overreaction in every possible way, for instance take haircuts, before Covid a haircut and a shave was $20 to $22 at the place i’ve been going for a decade, and when they reopen the same cut is $32, but i’m not complaining, they really took a hit-as in no business during the pandemic.

    And then it went to $42, before going to $60 (wish I could say i’m making this up-but no, and yes i’m looking for a new barber shop) and it wasn’t as if the price of scissors or razors went up, they’re still using decade old razors & scissors, but its more anticipation of inflation that is the driver, combined with how the barber is feeling the pinch at the supermarket, gas pumps and services.

    The reaction to inflation is immediate-there is no lag time.

    1. Tim

      A similar experience for me has been the cost of carbide tooling. My standard consumable tool but went from $65/bit to $105/bit from 2021-2022. When I asked my supplier what gives? Was the port congestion causing shortages? His response was ‘no, we laid in a large stock of carbide from China just before the lockdown, fortunately’. I believe he realized what he said after he said it..
      So for my little world, there has been a ‘make hay while the sun shines’ price gouging going on. Prices of carbide have only modestly declined since the peak of last summer and I’ve since switched to another manufacturer. Paying about 80/bit. Higher but not as bad.
      Similar story for sheet stocks of plywood , MDF, etc..
      One thing I’ve noticed over the years is when a big price hike for materials happens (due to a housing crises, gas delivery surcharges from to oil spikes, etc) the prices never fall back to pre-crises levels or surcharges aren’t removed after supply price spikes subside .

      1. jefemt

        Bingo! A New Floor of Costs is established.
        There is a lot of stickiness when humans are faced with realizing a loss and getting stranded.
        The hoodwink is that while a new floor in wages also comes along, wages still and all ALWAYS lag.
        I think Galbraith made that observation here.
        Maddening to observe Larry Summers and Jerome Powell conveniently ignore this and us from their comfy, completely out of touch ivory towers.

      2. TimH

        Similarly back in the day in UK when airlines could impose fuel surcharges. But they had a hedge on fuel, so this was essentially fraud.

      3. kam

        Hmm….M2 increased by $6 Trillion during the Covid experiment. The Fed increased its assets from about $6 Trillion to just under $9 Trillion, while U.S. debt went to 130% of GDP. And all Western Central Banks copied the Fed, which prevented any direct change in the USD relative currency markets.
        Too much money chasing too few Goods and Services. Still the best Yardstick.

      4. BrianF

        Anyone that believes CPI is crazy. Financial Planners assumptions that knew what they are doing baseline 5 percent inflation 2000-2020. I would say we are at 7 to 10 now. And it’s permanently messed up. 1993 gas is 1.17. I can’t find gas for less then 3 in southwest Florida that equals 5 percent over the last 30 years. Minimum. It has been over 4 dollars here as well and easily could rise and stick at anytime. The 2 percent fallacy was never realistic it’s was all rigged.

    2. cnchal

      >. . . and it wasn’t as if the price of scissors or razors went up . . .

      Rent probably did and it could be by a lot if Pirate Equity is the landlord.

      1. Bart Hansen

        Naw, it was the price of the hot lather gizmo his barber used for his shaves. Someone cornered the market on replacement parts.

    3. Carla

      Wow, Wuk! A few months ago, my hairshop (2 operators) posted an apologetic sign on the wall that they were raising the cost of a shampoo, cut, and color job for the first time in 4 years, from an incredibly reasonable $70 all the way to $75, due to the increased cost of hair care products. Difference between the left coast and the somewhat less-greedy rust-belt? Maybe.

  2. TomDority

    In any event, as with used cars, the sale or rental of existing homes is an internal transfer, with equal gains and losses on either side of the transaction It is not a relationship between “consumers” and “producers” of a good or service. It is not clear why this component should figure heavily, or at all, in policy decisions over “inflation.”
    So if over the years -the price of buying a home goes up but income stays the same – well then the consumer has less to spend elsewhere like the producers – the producers who spend more on overhead and debt service or stock buybacks and other non-productive vigs paid to others now must cover their increased costs with higher prices because they are not getting the increased sales because of the tapped out consumer — this is why the component is so important – not sure why that can’t be figured out

  3. jefemt

    From Galbraith: “In recent speeches (Cohan 2022), Chairman Powell has made this commitment abundantly clear – and even the fact that wage growth has slowed in recent months seems to be making little impression on the course of policy. Unemployment must rise, labor markets must soften, capital must gain, and workers must lose. That is where matters presently stand.”

    From Stephanie Kelton’s linked article yesterday regarding Powell’s press conference , the trillion dollar coin, etc. Powell: We want to see a lot of things but especially wages coming down.

    Maybe the independent sole proprietors like me and Wuk’s barber did not get the memo.
    I had to raise my hourly fee, mostly to keep up with meteoric real property taxes as my home town Aspenifies. But now, it is also food. And more.
    I do not begrudge what I have to pay for necessary services from local ‘experts’– they are in the same boat, trying to keep a nostril above the chop. No doubt it is all inflationary. $80/ hr carpenter, $105 for mechanic, $135 for plumber.
    I suppose we are not being Patriotic by lowering wages and taking the hit, moving in to our cars and sending the Keys to Jamie Dimon’s Big Mail Box.

    However, as has been noted here at NC, to turn the Good Ship Juggernaut away from The Jackpot, degrowf is a logical alternative. A notion abhorred by the present power structure.

    Wuk’s Barber will possibly NOT get ahead, but keep even, or slowly lose ground (that is the lane I drive in).
    4 x $32 haircuts a day, or 2 x $64 dollar haircuts, and more free time. In both cases, the barber and I have the same income, and with inflation, less to ‘participate’ in the economy.

    So it is not quiet quitting, but a reordering. We eat less here at El Rancho Costa Plenty. I walk from my door, blessed by a network of trails. No need to drive to the national forest boundary five miles away. And I am not the only one.
    Folks talk less about weather as they do remark on how expensive things are. Lotta restaurants and bars closing. And so it begins…

    That is 2023’s resolution for me, some by choice, some by larger circumstance: Do little, with less.
    It is up to me to keep it from being yet another long disheartening year. Equanimity. That’s the ticket!

    I really hoped that when we had the international three week significant shut down with Covid, and people seemed to have time to think and re-prioritize, based on mortality, and time to ponder, with that bluer sky and all that bird song, that maybe we would see a new direction. HA! Return to Normal! STAT!!!
    But now, three years on, with war, pestilence, plague, and money woes, maybe just maybe it really is slowly starting, and it is simply hard to see the new forest but for the trees.

    Who knows, with a drop from 8 billions to 4 billions in the next ten years, and the continued whacks to the head and heart delivered by repeated catastrophe, we might get some of it through our persistently thick, numb, skulls.

    Lotta pain in the interim. I wish everyone peace and grace in 2023- and beyond!

    1. fjallstrom

      Of course you are trying to keep up. We all are. That is what they need to stop or profits might decrease (the horror!)

      The purpose of the rent increases (that are in themselves driving up prices) is to get investments cancelled and force companies with loads of loans into bankruptcy. Then when enough people are unemployed, you and your friends are supposed to get desperate enough to not raise your prices.

      With enough people unemployed and homeless, and the rest to scared to ask for a raise, inflation will be in check. Then capital can get back to bidding up the price of assets, that doesn’t count as inflation. You know, houses and such.

      At least, that is how I understand the theory. Whether it actually works this time is another matter.

  4. Ignacio

    This is excellent. James G. is, at least, as great economist as his father was. He must be an excellent teacher. This, and not other stuff, might be the foundations of MAGA.

  5. spud

    or much of the inflation can be traced to free trade. oligarchs around the world are in a monopoly position on much. as countries try to free themselves from parasitical free trade, they may find growing their own food, and making some of their own stuff a lot less expensive, and use a lot less fuels.

    this will enrage wall street.

    1. kam

      Supply is monopolized throughout much of Western Economies.
      Crony Corporates are married to greedy spouses in Government. And the voiceless citizen is relegated to the “consumer” – an automaton, with an infinite demand curve and endless credit.
      A big Mack meal got change back from a dollar 40 years ago. The meal isn’t bigger (it’s smaller) and you might get change back from $10 bucks.
      Call it whatever pleases you, analyze it, massage it, but it is Inflation.

  6. Tom Pfotzer

    I second this point made above: vendors / suppliers used Covid as an excuse to jack up prices, and they forgot to lower their prices post-Covid-effect

    While asset inflation surely does reduce household buying power for other consumption, that actually should be deflationary, not inflationary.

    Some of the inflation is due to poor production system design. Materials costs (relentless rise) and energy costs (jagged spikes generally trending upward) are telling us that our existing production systems are using a great deal of expensive inputs. And every day, more people are chasing after those expensive inputs.

    As this resource contention gets worse, and it will, take a moment to ask yourself “does it have to be this way? Do our production systems (e.g. ag, transport, mfg’g, housing (esp. HVAC aspect), materials and energy acquisition) have to be so wasteful?”.


    My personal solution to inflation in many cases is “autarky” – create for myself what I would have purchased from others. BTW, my systems are highly resource-efficient, and usually quite labor efficient, as well (not always!).

    Here are a few examples of how I “redesigned my micro-economy”:

    My wife cuts my hair. I’m not a GQ model, so appearance isn’t number one on my list of priorities. I have a highly talented wife, and in short order she’s learned to cut hair almost as well as the barbers did. Note that I didn’t replace the barber for cost, but for Covid exposure.

    I paid off my truck the day I bought it. No debt. I rarely drive; it’s 17 yrs old, has 50K miles on it. Work from home.

    I do all household repairs; there’s no system or appliance I can’t fix*. I buy all my parts online.

    My wife and I are both good cooks, and can make food almost as well as the pros.

    I could go on, but you get the picture. Several of my former service-providers have priced themselves high enough for me to suffer the one-time indignity of replacing them.

    I’m just working my way down the list, picking the next candidate based on how much it costs to buy the product from others (and how much price gouging is happening), and what it’ll take me to replace the vendor or product with one I provide for myself.

    If vendors act like they’ve got me over a barrel, they get prioritized for replacement.

    I’m now building a basement hydroponics “lettuce factory”. We spend a lot on produce, and the quality’s not great. I do automation. The factory will be almost all automatic, except harvesting and bi-weekly 1/2 hour maintenance.

    The nation-wide supply chain for salad ingredients that stretches from Central Valley CA aaaaaalllllll the way to my household is about to be replaced with one that stretches all of 50 feet, including the stairs.

    The next round of our household’s “off-the-ratwheel” sweepstakes is … energy.

    * some truck maint has to get done by pros. Also roof replacement & HVAC replacement got contracted out. Roof has to get done fast, and it’s a big job. HVAC gear – the good stuff – is only sold to licensed dealers, and I’m not licensed to handle refrigerants (EPA lic. req’d).

    1. Mikel

      “Several of my former service-providers have priced themselves high enough for me to suffer the one-time indignity of replacing them….”

      That gets trickier in areas of the economy with cartels and monopolies.

      You make me think more about the future of narrowing of options and increase in substandard services (re: “AI” as example).

      I also don’t think the “cashless” push is about creating more options/alternatives for people.

      1. Tom Pfotzer


        I agree on all counts.

        That’s why I’m spending so much time and effort learning how to design, fabricate, operate and own production processes.

        Ironically, it’s never been easier to do, but it’s still quite challenging.


        These days, you hear a lot about “re-building the Commons”.

        What would that commons actually be in today’s context?

        Here’s a few elements I’d contribute to the commons:

        a. Library of downloadable component designs, which can be uploaded – right from your smart-phone – to a fabrication center for robot-controlled mfg’g.

        b. A community-owned fabrication center, where you can go pick up the design you just submitted for mfg’g

        c. And while you’re there, you visit the co-located indoor farmer’s market / warehouse store where you pick up your produce. That produce has minimal or no packaging, and you …

        d. drop off your returnable bottles and jars to be cleaned and re-filled right there at the co-op, and then…

        e. back home you go, with your repair part in-hand, to use it to fix your washing machine, which, btw,

        f. was completely manufactured using downloadable designs from ….. you guessed it, the Commons Library of Contributed Parts, which you and I helped build

        The point is: we don’t have to play their game. There’s billions of us, and only a few of them.

        Build the commons, then protect it. And use the hell out of it.

        Stuff _them_.

      2. Joe Renter

        Speaking of cartels. Dentistry work has really gone through the roof. I used to pay about 600.00 for a crown. Now here in Lost Wages a crown is from 1100.00 to 1500.00. I found a cheaper dentist and they were helpful in directing me to dental insurance that will save me some money. In the future it will be treatment south of the border. What a sh*t show this country has turned into.

  7. Keith Newman

    Very insightful article. Thx for posting it Yves.
    Riffing off the personal autarky comments above, here is mine.
    I retired 10 years ago with a good income. Prior to retiring I thought I’d got to restaurants a lot and indulge in lots of personal service expenses. But I didn’t.
    My wife and I rarely go to restaurants, maybe once every two months. We generally prefer our own cooking. We love Indian and Thai cuisine and it so happens that it’s possible now to buy amazingly good sauce kits to use at home. The price of these has not increased.
    Locally grown food has increased in price somewhat (10-20%) but poultry and dairy are still reasonable. Fruit, vegetables, greenery have gone up but they are a small part of my food expenses..
    I drive my car about 5,000km (3,000 miles) a year. The rest of my local transportation is by bicycle except in the four months of winter when it can be dangerously slippery or too cold. I live in Quebec near Ottawa, Canada. But even in winter I can get around locally at least half the time.
    I did replace my 35 year-old very worn couches with new, fairly pricey locally-made ones. Supply problems did delay them by several months. Still, I did get them, albeit a few months late and they are terrific.
    Natural gas prices have gone up by 50% as a result of increased exports to the US due to that country supplying European markets that have imposed sanctions on themselves. But electricity prices from government-owned Hydro-Quebec have barely budged.
    Our one indulgence is travel to Cuba to a lovely resort twice a year. The price of that has gone up a bit (10-15%) due to it being partially priced in USD but it remains excellent value.

  8. Susan the other

    It is understandable that everyday inflation is the give and take of a healthy market economy and the Fed shouldn’t get it mixed up with pure inflation and decide the best way to tame an overheated economy is to bring wages down. However, that’s not the Feds mandate – the Feds mandate is to ensure employment while tweaking interest rates a little to cool the economy. Powell is off his rocker if he is planning on throttling labor. Funny how when a barge load of money is washed into the economy and it gets sponged up by the MIC and other big industries and then trickles down into ordinary prosperity then all of a sudden it’s a problem. I can see that pure inflation does cause overcapacity which for mature industrialized economies is a real problem, but that should be taken care of by industrial policy which ensures everyone their share. Aka the social contract.

  9. Karl

    What stands out to me, in this fine essay, are two quotes, the latter logically following from the former:

    But [the spurt in prices] did hand the Federal Reserve a political problem, which it proceeded to solve, in what may prove to be the worst way…. workers must lose. That is where matters presently stand.

    The “political problem” came about during the elections of 2022. I’ll point out another article that Galbraith wrote recently, about the political bias of the Fed for higher interest rates during Democratic administrations:

    We [Galbraith et. al.] also found a striking partisan political bias in monetary decisions. During the period we studied, after accounting for both inflation and jobs, interest rates were sharply higher (and yield curves flatter) in presidential election years when the Democrats held the White House. In every model we ran, this bias was substantial.

    To clarify the political landscape, the first quote above can be refined to read: marginal workers of the working class must lose. Clearly, Biden represents the PMC and the interests of capital. If Trump had been in office, he would have blasted Powell for raising interest rates during an election season and Powell would have backed off. I was infuriated that Biden didn’t do likewise. I believe the rise in interest rates throughout 2022 is perhaps the single most important factor behind loss of the House to Republicans last November.

    What can be done? I would propose, at a minimum, that we stop reporting “Total GDP” which masks the dire straits of the bottom 50%. Biden boasts that most recent GDP report shows a smidgen of real Growth (around 2%). But most of that growth is going to the top 50%. GDP is calculated on both a “goods and services” basis and an “incomes” basis as a check against eachother. If real “incomes” GDP–consumption and savings–was reported separately for the top 50% and bottom 50% we’d see a huge divergence in the fortunes of the PMC vs. the working classes. We’d also see a huge divergence in Net worth, as the working class dissaves and the PMC gains on asset inflation. It’s the working class and poor that are primarily hit during recessions. My guess is that the most recent GDP number, if reported this way, would show real growth of 5% (or more) for the top 50% and a real decline (-3% or less) for the bottom 50%. Therein we’d see much of the very real underpinnings for the polarization of America. My guess is that the bottom 50% is disproportionately “Red” (as in red with resentment) and the top 50% is blue (as blue sky on a sunny day).

    If “Blue America” could see things as they really are for “Red America” I do believe policy making — fiscal and monetary — would be more reflective of the political urgency to DO SOMETHING. If this isn’t done soon, the January 6 insurrection will be a more frequent occurrence.

  10. Rubicon

    Wouldn’t it be great if both economists: Dr.Galbraith and Dr. Hudson could have a conversation about “inflation,” and, it seems, how differently Galbraith differs from Hudson!
    Dr. Hudson seems to put the onus with higher Interest Rates which than leads to greater job loss for workers. Dr. Hudson doesn’t seem to acknowledge the chief perpetrator behind this. We call it The FED. Dr. Galbraith goes a stretch further: he sees how Inflation raises prices, especially in the energy world, with higher prices for credit card usage, food, rent and medical costs.

    To support Dr. Galbraith’s tenet: we commoners are seeing much higher natural gas prices in the Pacific Northwest. From Oregon to Washington, we see price gouging, which brings in greater profits for that gas company in the PNW while we are stuck with higher natural gas costs.

    1. Keith Newman

      @Rubicom, 4:27
      Michael Hudson stresses the effects of government-permitted monopolies in pharmaceutical drugs and other industries, the effects of the housing bubble on housing costs to the advantage of big finance, interest rate increases as increased cost for business, the absurd US healthcare system, the most expensive in the world. Etc. All theoretically resolvable though appropriate government action.

      See his analysis last week at https://www.nakedcapitalism.com/2023/01/radhika-desai-and-michael-hudson-discuss-the-causes-and-politicization-of-inflation.html

  11. korual

    Even high school students are taught the difference between “price increases” and a general “inflation”. My personal rule is that if there isn’t a price-wage spiral then it isn’t inflation. Perhaps calling price rises in some sectors “transitory inflation” is confusing?

    The interest rate rises are there to stop any potential price rises, but they’re stimulating strikes instead. It’s tricky when your own policy, energy supply sanctions, caused the problem.

  12. bill dietrich

    See Business as a System of Power By Robert Brady, 1943.

    Business is in politics and the state is in business. We are opaque
    to the political import of this massing of business power, and we
    still insist on regarding it as primarily a concern only of the businessmen. Meanwhile, the lawyers with their convenient conception of the role of the law, the public-relations men, the press, and all
    the other pliant agents of organized business go busily about on cat feet as they spread the net and
    tighten the noose for those so abundantly able to make it “worth their while.”

  13. podcastkid

    I’ve only scanned through this piece, so hopefully someone can tell me where Galbraith goes over just the huge amount of raw wealth [largely created by workers in the real economy] that has been dragged over to the finance economy. Jack Rasmus brought this to my attention. I realize dividends are one thing and buybacks another, but according to Rasmus the former paid out and the latter pulled off…together equal $15 Trillion since 2010.

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