40-Year High Inflation is Not a Surprise

Early in my career, I became the electric vehicle resource expert for the transportation section of the Department of Energy. Congress asked DOE to find out if penetration of electric vehicles would simply exchange an oil/gas crisis to a battery material crisis.

DOE choose three entities: a Beltway Bandit, a University research outfit, and Argonne to conduct a six-month study and report the findings at a joint session.

At the session, I predicted the price of Cobalt (a main battery resource) would inflate to $55 per pound from the current $5 a pound. The MIT/Harvard group riddled me proclaiming their study showed no increase.

Three weeks after my stunning forecast the Katangese rebel movement backed by the Russians invaded the Congo and captured the world’s only Cobalt mine. The price of Cobalt shot up to $55 a pound. None of us knew the Rebels existed.

Today’s inflation is not the same case. The factors were known. Let’s take a look at the types of inflation and the factors impacting them.

Demand-Pull Inflation

Demand-Pull inflation occurs when consumers are being paid but have nowhere to spend their money. This is usually caused by a war, but this time was the pandemic. Unfortunately, the Federal Reserve thought the Pandemic demand pull was temporary and did not act quickly to quash it.

Cost-Push Inflation

Cost-Push inflation occurs when the cost of making goods increases beyond productivity increases. Businesses using the excuse that costs are increasing raise prices greater than the difference between costs and productivity. Supply chain bottlenecks provided businesses with a great excuse. The Fed again was late in seeing the full impact of this type of inflation.

The Result

Inflation is at its worse peak in over forty years, and the FED is scrambling to get it under control. The numbers have already begun to show the FED actions, the improvements in supply chain distribution, and cost moderations.

Gas prices seem to be the most visible inflation symbol, although groceries are a close second. Gas prices peaked in the Midwest at $4.97 in the week of June 13 this year, and are now $4.42. This is a result of the oil markets settling down and tax holidays being declared on gasoline. This is a key element in the Consumer Price Index (4%). Housing and consumer spending will soon be hit by the large FED interest rate increases and this will result in lower prices.

In other words, all factors are trending down and deflating. That decline will accelerate in the next few weeks.

The degree of deceleration and time for it to work out may impact the fall elections. Voters generally don’t really make up their minds until two weeks before the vote. It should be noted that the number one reason people are saying they’re going to vote is inflation.  If inflation moderates, then that could be a problem for Republicans.

About Larry Hill

Dr. Larry Hill is Chair and Professor of Economics. Areas of interest include economic analysis, energy economics cost benefit analysis and economy. To subscribe to the email list of Dr. Larry Hill's Economic Memos, contact Tracey O'Brien at obrientr@lewisu.edu. Credentials include 1967 B.S., Indiana State University, 1968 M.S., Indiana State University, 1976 Ph.D., Northern Illinois University He is a member of honorary fraternities in economics and social science. He is currently writing a book on Managerial Economics and revising previous book, "The Basic Macroeconomics of the American Economy"

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