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Nate Jackson / June 11, 2021

Inflation Is a Middle Class Tax Hike

Rapidly rising prices for all manner of goods and services are hitting us all hard.

It seems like just last month that we were expressing concern over rising inflation. Oh, right — it was. The Consumer Price Index (CP) jumped 4.2% in April. May said, “Hold my beer,” and saw a spike of 5% year over year.

CNBC crunches the numbers and right up top emphasizes the bad news:

  • fastest pace since August 2008

  • higher than Wall Street expectations

  • The 3.8% rise in the core inflation rate, which excludes food and energy prices, was the sharpest increase in nearly three decades.

There’s not much sugar coating here — the economic news is not good. Supply chains are broken. Companies can’t find enough workers, and the ones they can find are commanding higher wages. Inflated prices are largely a symptom of these underlying ailments.

Heather Boushey, a member of the White House Counsel of Economic Advisors, shrugged off the report as good news: “Today’s data on inflation is the latest indicator that things are both moving in the right direction and that we have supply-chain hiccups.”

“Hiccups”? We realize that having to wait a few months for a recliner or a bicycle is truly a First World Problem. But this is also not the America Joe Biden promised us, and it’s a far cry from the roaring American economy Donald Trump was fueling before the pandemic.

The Federal Reserve’s response? Apathy. “Though the inflation readings are well above anything seen since the 2008-09 financial crisis, the Federal Reserve has been largely dismissive of the numbers,” says CNBC. “Central bank officials believe the current rise is due to temporary factors that will abate as the year goes on and look higher because of comparisons to the year-ago period, when much of the economic activity remained restricted due to pandemic precautions.”

There is some truth to that, but it’s far from the full picture. As it turns out, you cannot shut down much of the economy and then have the government flood the economy with $6 trillion in “magic money” and not have prices increase because of the havoc that wreaks on supply and demand.

The same experts who totally underestimated the inflation rate are telling us this is no big deal and prices will recede before long. That’s no doubt true of some things like lumber and houses, but it’s certainly not guaranteed, and it’s perhaps even unlikely for most goods and services. Higher prices will be the new floor.

“Chipotle executives announced this week the fast-casual chain will be raising prices by about 4 percent to offset some of the costs of the tighter labor market. Procter & Gamble warned customers earlier this year to expect mid- to high-single-digit percentage point price increases on staples like diapers and tampons,” reports The Dispatch. In fact, “The May 2021 NFIB Small Business Economic Trends survey found 48 percent of small businesses reported raising their prices, compared with just 5 percent that reported lowering them.”

Given that generous unemployment benefits have raised expectations for wages — just about at Democrats’ preferred $15 an hour, as it so happens — companies are going to be paying more for labor over the long term. And the supply disruptions show no sign of abating, which only exacerbates price problems.

That’s a middle class tax hike if we ever saw one.

But there’s also the national picture, which political analyst Kevin Williamson elucidates:

The worrisome, if not quite worst-case, scenario is this: We start to suffer genuinely problematic inflation, the Fed jacks up interest rates to stabilize prices, the cost of borrowing for the U.S. government goes up substantially, the cost of financing the debt rises from 8 percent of the budget to 12 percent of the budget and then appears set to keep on marching up from there, the economy goes into recession, and Washington has a choice — it can cut back spending during a recession, thereby almost certainly deepening that recession, or it can go even more deeply into debt at a time when the cost of debt service already is climbing, thereby making both the total debt and the cost of financing it that much worse.

“This,” he concludes, “is where fiscal crises and sovereign-debt crises come from.”

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