🌍 A world without inflation

Hey hey, happy Monday.

Well…that happened.

America wants a world without inflation. Fine, have at it.

I have some thoughts on what it’ll look like, and what we’re giving up in our obsession over prices.

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We learned an important thing about the American electorate this week.

People are pissed about inflation.

So pissed, in fact, that they were willing to kick out the sitting party in the White House over it.

According to The Wall Street Journal and AP VoteCast, 96% of voters said “high prices for gas, groceries and other goods” were a factor in their vote. That is a staggering number, especially when you consider high prices came amid a stable job market and healthy wage growth.

2022’s inflation crisis is our most recent economic wound, and Tuesday’s election was the first sign that this wound is still fresh.  Americans can’t just get past higher prices, no matter how many words we write about economic affordability and the stock market.

I have a few hindsight-is-20/20 theories on why inflation still looms large in Americans’ minds.

But the biggest threat ahead of us may not be inflation.

Instead, it may be this idea of a world without inflation because everyone from Main Street to the Oval Office is petrified of prices spiraling out of control.

Imagining a world without inflation – or rising prices – is a complex exercise. 

For one, inflation of all shapes and sizes has existed in the U.S. for much of the past several decades. 

Since 1948, the Consumer Price Index – the most well-known way of measuring the change in prices of common goods and services – has grown about 95% of the time on a year-over-year basis. 

And this has largely been a good thing. In a healthy economy, more Americans are employed and earning good wages. They spend more, too, and companies adjust prices to keep pace. Yes, the average price of a gallon of milk has soared from $2.50 to $4 over the past 30 years, but the average worker’s hourly pay has also increased from $12 to $30.

Deflation—the rare 5% of years when prices fell on a year-over-year basis—happened after the post-World War II boom and the global financial crisis. Both were painful periods marked by high unemployment and steep market sell-offs.

Look. I think this context is important, although I realize that a lecture on inflation isn’t really what the world needs right now. Affordability is a huge issue for many Americans, and Wall Street has tried to solve it by spouting context, nuance and logic (guilty as charged).

However, context and nuance fall flat when your weekly grocery bill is 25% higher, the cost of a mortgage has doubled and you can feel the American dream slipping through your fingers. Economic desperation has pushed Americans to the brink, and we need sensible reform.

And yet, demonizing inflation still ain’t it.

Optimizing one part of the economy—say, inflation—requires de-prioritizing another part. It’s all about tradeoffs. And right now, prioritizing price stability means we may have to make costly sacrifices in other areas.

Tradeoffs got us here, by the way. Inflation spiked to 9% in 2022 in part because the powers that be chose to prioritize the job market and public health during the COVID pandemic.  

The Federal Reserve – those snuggly, glasses-wearing economists who control interest rates – and Congress took extraordinary measures to prevent Americans from facing financial hardship during weeks of government-mandated shutdowns.

Huge interest rate cuts, small business loans, mortgage foreclosure moratoriums, student loan interest relief—and, most notably, 476 million stimulus checks sent directly to Americans. Free money with no strings attached.

All of this came at the risk of sparking rampant inflation—an outcome we ultimately had to face. A reality that we clearly find unacceptable.

In the months ahead, it’s not crazy to think that companies, politicians and consumers could twist themselves into pretzels to ensure another inflation crisis doesn’t materialize.

A world without inflation, but at what cost?

Your job. I understand the complicated balance of jobs and prices. Inflation impacts everyone, while unemployment only affects a smaller slice of the population. After all, nine out of ten working-age Americans still had jobs at the peak of the 2008 financial crisis.

Still, it’s a devastating tradeoff. The COVID job market recovery was one of the fastest in history. The Fed and Congress’ efforts during COVID didn’t just keep us employed, it gave employees the best negotiating stance they’ve had in decades.

A bigger focus on inflation makes the job market more vulnerable, and mass unemployment is a uniquely damaging scenario for everybody involved.

The crisis tools. There are two ways to solve an economic problem: through monetary (money supply and interest rates) and fiscal (spending and taxation) policy. The Fed controls monetary policy, and Congress controls fiscal policy. In times of distress, the two can tag-team the problem with their respective tools.

Not anymore. The Fed is legally obligated to balance price growth and employment, so Fed Chair Jay Powell is here for you. Congress? Maybe not. The fear of a 2022 inflation repeat could limit future spending packages. Fewer tools could mean more painful and prolonged crises that may not be stemmed by stimulus checks.

Big ups, big downs. We live in an era of extremes. High highs, low lows, loud noises, unprecedented times. Financial markets have reached some pretty harrowing extremes in recent decades: the worst stock market crash since the Great Depression, followed by the fastest stock market crash in history during COVID.

Information moves faster than ever, and we can trade in seconds with just a few swipes on our phones. The government needs flexibility to soften the impact of a crisis—but the fear of inflation might cause some hesitation. Ultimately, less government intervention could mean dramatic shifts in confidence and larger swings in prices. You’re gonna need those portfolio cushions, my friend.

Interest rates. If the Fed has to overcompensate during a crisis, there’s a greater chance that interest rates will need to be cut even more. Add on to that the increased need for bonds as a portfolio cushion, and you’ve got a rush into government debt. Great for mortgage rates, not so great for your savings account.

Innovation. America is the best in the world at innovation, so I hate that I have to bring this up. But when executives, politicians, and inventors focus more on costs, there’s less room for ideas that help grow and strengthen the economy. While any good business owner will tell you that balance is key, government policies aimed at fostering homegrown innovation have been wildly successful in recent years (hello, CHIPS Act and Inflation Reduction Act). When inflation is the priority, we take fewer swings at radical — and effective — ideas.

In true OptimistiCallie style, I want to end this rant-y post with a hint of good vibes.

I still believe in America. I’m not selling my long-term portfolio and moving to Costa Rica (although I’ve heard it’s nice this time of year).

But in the coming months, we’ll have to reckon with the tradeoffs of demonizing inflation.

Economic affordability is a complex problem.

Striving for a world without inflation may not get us there.

Thanks for reading!

Callie

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