Left and Right: Both Mistaken on Inflation

With inflation hitting a 31-year high, commentators are now routinely giving their opinions on inflation. Unfortunately, most of them—on both the left and the right—are mistaken.

The left initially claimed there was no inflation before switching to its oft-repeated line that inflation is transitory, meaning not long-lasting. But inflation has proved to be quite resilient. More recently, many on the left have taken to extolling the apparent benefits of inflation, such as cost-of-living adjustment (COLA) increases for those on fixed incomes.

NBC correspondent Stephanie Ruhle recently tried to make the case that savings have risen faster than inflation, so people have the money to pay higher grocery bills, and those people are better off. But wages and savings have not kept up with inflation and consumers are worse off now than they were a year ago.

But some on the right have made the same misinformed arguments. Only days after criticizing a competitor’s misleading headline, Fox Business had an article citing record-setting COLA increases for Social Security recipients as a benefit from inflation.

This is no benefit at all. Those on fixed incomes are suffering through a year of rising prices to have their incomes raised some time in the future, and only as much as prices have increased. Meanwhile, anyone with a retirement account has seen its relative value decreased by the hidden tax of inflation.

And both the left and the right of late have ignored the reality of inflation when evaluating economic data.

The most recent retail trade report from the Census Bureau showed retail sales in October being significantly higher than expectations, but more than half of the increase was inflation. After accounting for this, the report was actually well below expectations.

Similarly, most people, regardless of political affiliation or philosophy, seem unaware of how inflation drives asset bubbles—which is contributing to the current growth in house and stock prices.

Those on the right also say deficit spending by the government will add to inflation. This is not exactly true either.

When pressed by a reporter, White House Press Secretary Jen Psaki said, “No economist out there is projecting that this [more deficit spending] will have a negative impact on inflation.” While her claim is completely untrue, since many economists argue precisely that, those economists are also misguided.

Under President Ronald Reagan, the nation had record-setting deficits and amassed record levels of debt, all while inflation decreased. Conversely, in the 1920s, the federal government ran a surplus every year of the decade, but inflation towards the end of that period caused a bubble in the stock market, leading to the infamous crash in 1929.

History—and sound economic theory—tells us that federal deficits are not the primary catalyst for inflation. Excessive government spending certainly has negative consequences, but inflation only arises when the Federal Reserve (the Fed) purchases debt instruments, like government bonds. That has happened whenever the Fed tries to implement monetary “stimulus,” which often happens to occur when Congress borrows excessively. This coincidence has clouded the distinction of which agency is causing what.

President Abraham Lincoln, while ruminating on the Civil War and the perspectives of both the North and South, observed that one side must be and both may be morally in the wrong. Similarly, the popular takes on both the left and right regarding inflation are incorrect; neither side understands the fundamental principles behind inflation.

Only the Fed can cause inflation because only it controls the ability to create money, which it does chiefly by purchasing government debt with money created out of nothing. Likewise, only the Fed can rein in the beast that it set loose.

The one data point in favor of those on the right is the recent rise of Modern Monetary Theory (MMT). It is a bit of a misnomer, as there is nothing modern about it and it focuses less on monetary theory and more on the fiscal policies of taxes and government spending.

Nevertheless, a key feature of the theory is that the Fed essentially acts as the principal financing arm of Congress’ deficit spending. With Lael Brainard as Vice Chair, the Fed will likely pursue MMT. That will make government deficit spending inherently inflationary. At that point, the political right will be genuinely right, but for the wrong reason.

As is often the case, the talking points of both the left and right on inflation are mistaken; it turns out their soundbites are not very sound.

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This article was published on December 1, 2021, and is reproduced with permission from The Texas Public Policy Foundation.