Harebrained Schemes

| March 15, 2024

No, inflation is not caused by greedy corporations. Inflation is caused by too much money chasing too few goods. Of course, the possibility exists that corporations are schizophrenic, sometimes deciding to raise prices and sometimes lowering them. In some people’s imaginations, energy executives must sit around a conference table having discussions such as “people need a break. Let’s lower oil prices from over $100 per barrel to less than $50.” Then, everyone must nod their heads in agreement, “Yeah, that sounds great.” Other times, they decide to punish consumers, using their mystical ability to hike prices again.

Several years ago, during the beginning of our current inflation spiral, I pointed out that globalization made the available amount of goods highly elastic. Rising demand could be met through expanded supply chains, thus lowering inflation and increasing global prosperity. The supply of houses, on the other hand, cannot be met through global supply chains, “so we see inflation there.” Supply chains are mostly back to normal, which has steadily reduced inflation. However, housing is still a problem.

The February CPI report bears this out. Overall energy costs continued their decline, dropping overall by -1.9%. Fuel oil fell by -5.4% and gasoline by -3.9%. Greedy energy execs must be feeling unusually generous lately. On the other hand, the cost of shelter rose by 5.7% and transportation costs rose by 9.9%. Hospital services also stood out by climbing year-over-year by 6.1%. The oil execs must have passed their greedy hats to the landlords and hospital executives. *

I am going to stick with my belief though. The combination of fiscal and monetary stimulus has driven up the demand for housing at a time of insufficient supply. In other words, too many dollars are chasing too few goods. A lot of those $250,000 stimulus checks went to buying second homes, many of them are now being rented through Airbnb or Vrbo, worsening the housing shortage.

Be prepared for harebrained policy ideas by politicians. Senators are writing letters to Fed Chairman Jerome Powell that he should lower interest rates to make housing more affordable. Without an increase in the supply of housing, increasing monetary stimulus by lowering rates will only drive prices higher. If you already own a home, this is great. If you do not, and if you are also suffering from paying higher transportation costs to get to work, your life will get worse, at least until we build more housing.

Next week, I shall discuss Adam Smith and the pin factory.


* U.S. Bureau of Labor Statistics. https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category.htm. Accessed 03.15.2024.