When Reagan entered the Oval Office in 1980, he inherited an economy struggling with runaway inflation. In January 1980, inflation was 13.9 percent. By April, it had increased to 14.8 percent.
For anyone who lived through the late 1970s to early 1980s inflation era, life was tough.
Fortunately, by the late 1980s, Reagan’s free-market policies, coupled with a hike in interest rates, had wrestled inflation down to a more sustainable 4.6 percent.
Since the late 1980s, inflation has remained off of Americans’ radar of things to worry about. That is, until now.
According to the Bureau of Labor Statistics (BLS), inflation is back. Here are a few of the more troubling inflationary trends based on the April BLS report.
In April, overall inflation increased at its highest rate in more than 13 years. The Consumer Price Index rose a whopping 4.2 percent year-over-year. The month-to-month gain of 0.8 percent blew away the estimate of 0.2 percent.
Aside from the ominous macro trends, at the micro level inflation has already reared its ugly head in many sectors. For example, energy prices are up 25 percent year-over-year. Gasoline prices have skyrocketed nearly 50 percent over the same period. Fuel oil also jumped by 37 percent.
But that’s only the tip of the inflation iceberg.
Used car and truck prices, a good gauge of inflation, increased 21 percent year-over-year. Housing also jumped more than 2 percent. Lumber is up a mind-boggling 124 percent. Copper (and many other commodities) is also through the roof at nearly 36 percent inflation. Food prices are also rising fast.
Everywhere you look, from the grocery store to the gas pump, inflation has arrived.
So, what is driving the return of inflation?
According to the Federal Reserve Bank of San Francisco, inflation is driven by two primary factors: demand-pull inflation and cost-push inflation.
“Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity.”
“Cost-push inflation, on the other hand, occurs when prices of production process inputs increase. Rapid wage increases or rising raw material prices are common causes of this type of inflation.”
Unfortunately, it seems as if we could be caught in a Chinese finger trap inflationary environment. In other words, we could be getting it from both ends.
But that is only part of the current inflation story. Another, potentially far more ominous cause of inflation occurs when the government floods the system with currency and people’s confidence in the currency goes south fast.
We saw this play out in Weimar, Germany to disastrous effect. It is also currently happening in Venezuela, where money printing knows no end.
And, astonishingly, in 2021 America, we could be headed down this same disastrous road. Since the onset of the pandemic, the U.S. government has pumped trillions of “new money” into the system.
It doesn’t take an economist to understand that when the government prints trillions of new dollars, the value of existing dollars declines.
And so, unless the Biden administration takes a page out of Reagan’s inflation-killing playbook, the next decade could resemble the stagflation that ailed the U.S. economy during the 1970s. After all, history does tend to repeat itself.
Chris Talgo ([email protected]) is senior editor at The Heartland Institute.