We’re going to play another round of Spot the Generational Differences, but this time the focus is not on some bit of nostalgia or a fading technology but an old economic topic making a comeback.
News item: The Federal Reserve, concerned about growth contributing to higher inflation rates, plans a series of interest rate increases this year to temper the recovery.
A. Good. Unchecked inflation makes financial life tough for consumers and businesses. And once it gets going, it’s even more painful to bring under control.
B. The Fed is shooting at something that isn’t there. The “recovery” has been tepid at best, and aren’t we overdue for another recession?
C. What’s inflation?
That last response is a far more reliable indicator of age and economic experience than, say, hair color. If you were around for the ’70s as a consumer, business owner or employee, what you remember about the decade is not so much bad clothing, music and cars but a bad economy, marked by high inflation. If some of the labor-contract wage gains from that era seem a bit munificent compared with what’s negotiated today, they were driven by inflationary prices, which then went up because of higher labor costs, so workers wanted more just to keep pace, and on went the cycle.
What broke inflation fever was a combination of factors including high interest rates, plunging oil prices and a greater reliance on imports. Those who experienced the ’70s and early ’80s firsthand can regale the young ones with tales of double-digit mortgage rates.
That comparison is what makes the current debate about inflation (and interest rates) so interesting. Many people participating in it haven’t experienced a true bout of inflationary pressure. In 1980, the U.S. consumer price index topped out with a 13.5 percent increase. Last year, it was 1.3 percent. And nationally it hasn’t been above 4 percent since 1991. As for mortgage rates, BECU last week was quoting 4.4 percent on a 30-year fixed, a rate that would have been considered lunacy in 1980.
Even those who were around might be sympathetic to the argument that there’s no inflation to try to stamp out, not when compared with what they were dealing with 35 years ago and not when trying to do so might put a heavy foot on economic vibrancy. Outside the tech-distorted world of downtown Seattle, many businesses, industries and families are living in the shoulder-shrug economy: “It’s OK, not great, could be worse, could be better, so-so.”
Speaking of which, how is this region doing on inflation?
For that we’ll turn to the Bureau of Labor Statistics’ calculation of the consumer price index for Seattle-Tacoma-Bremerton (defined as Island, King, Kitsap, Pierce, Snohomish, and Thurston counties). As of December (the most recent report; an updated version is due March 15) consumer prices for the previous 12 months rose 2.6 percent.
Not exactly fear-inducing.
And it looks even less so when considering some of the components. Housing costs have been posting some eye-catching percentage increases, no surprise to anyone who has perused housing prices or apartment rentals lately. But inflation in that category is an issue for those looking to buy or with a rental-price reset due soon. For those in a home with a fixed-rate mortgage and looking to stay put, they’re not seeing the inflationary pressure.
How about food prices? They’re actually down from a year ago, at least if you’re eating at home. Unlike with housing, consumers have some flexibility in dealing with food inflation. Beef gets too pricey? Maybe chicken is a better deal this week, or perhaps the less-expensive store brand will substitute for the national brand.
Energy and utilities represent another big category for consumer spending. We’ve been getting something of an energy dividend the past decade with price declines in natural gas and gasoline. Those commodities are now rising in price, and so are utility rates. Tacoma Power and Water customers are facing proposed rate increases. Flexibility and substitution are limited in this category, and higher energy prices mean higher prices in lots of other categories. That’s worth watching.
Interestingly, CPI calculations don’t appear to track the category in which many consumers and businesses in this region increasingly feel squeezed by inflation: taxes. Or haven’t you looked at your property-tax statement or car-tab bill lately?
Higher interest rates carry their own costs (higher business and consumer borrowing costs) and benefits (retirees want more income on their savings). Who gets hurt and burned has to be included in any decision on whether to raise them. But if the point of doing so is to quell inflation, it might be useful to know whether there’s anything to quell.
Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at email@example.com.