How Serious Is Inflation in the United States?

Will inflation stay high regardless of whether the Fed chair stays on or is replaced?

I write this while traveling on the Shinkansen Nov. 18. As a new wave of COVID-19 infections has subsided, I have returned to lecturing locally since October and am on my way to Fukuyama, Hiroshima Prefecture, to speak to the Domestic and Foreign Affairs Research Association.

The Shinkansen Green Car Is Full for the 1st Time in a Long Time!

The green [first class] car on the Tokaido Shinkansen this morning is full. In October, when I headed to Shin-Aomori Station on the Tohoku Shinkansen immediately after the emergency declaration, I could rattle around the inside of the car and I was able to participate in a Zoom meeting.

When was the last time the Shinkansen green car was fully booked? Probably before the 2008 Lehman Brothers shock, around the time of the 2005 Aichi World Expo.

That’s because economic activity is resuming, which in itself is very good. The Ginza (Tokyo) at night was completely back to normal at the end of October. Everyone is wearing masks and face guards to serve customers.

Nevertheless, people seem to be enjoying daily life again after a long absence. The company president who invited me also seemed to have spent very little on entertainment this fiscal year, so I guess it’s all good, my friends.

However, when economic activity returns like this, bottlenecks begin to appear everywhere. It is only natural that this happens when demand returns suddenly to a place squeezed by the COVID-19 disaster.

In some areas, gasoline prices have started to exceed 170 yen (approximately $1.50) per liter. The Ministry of Economy, Trade and Industry is offering subsidies to oil wholesalers because of the difficulties in agriculture and in the fisheries, and the impact on nursing and welfare jobs.

But wait a minute. Just because you give money to the oil companies doesn’t mean that they will lower their prices. And even if they do, there is no guarantee that gas stations will lower their prices.

More than that, a gasoline tax of about 50 yen (approximately 44 cents) per liter is supposed to be added to the current price of gasoline. Wouldn’t it be more reasonable to reduce the tax for a limited time? Have you never heard the saying “A single advantage is no match for a single harm?”

On the other hand, the government is now in the final stages of deciding on the supplementary budget. In order to correct the excesses of the previous prime minister’s office initiative, the Fumio Kishida cabinet has considered the discussions within the Liberal Democratic Party as it formulates economic measures. We must also thank all those who properly helped win the general election.

As a result, government fiscal policy has come to resemble corporate largess. At least it will not be new capitalism.

Furthermore, the government and the ruling party must not forget to ask for support in next year’s election as well. If Kishida wins the general election and also the House of Councillors election, there will be no national election for the next three years. In other words, Kishida will be able to comfortably stay in power until September 2024, when his term as Liberal Democratic Party president will end.

Instead, the problem of income taxes, which was not raised this time, will firmly come up again as part of tax reform next year. Japan’s government has never been this indulgent. I can’t say I didn’t know.

Gasoline Prices Aren’t Going To Be Popular in the US

By the way, the price of gasoline is even more outrageous in the United States. A gallon of gasoline, which is about 3.7 liters, is $3, much cheaper than in Japan (a little over 90 yen (approximately 79 cents0 per liter), but in an automobile society like the United States, this is hitting very hard.

President Joe Biden has asked the Federal Trade Commission, which is the equivalent of the Japanese Fair Trade Commission, to investigate the price of gasoline. While it is probably a political gesture, it reveals the current administration’s difficult domestic situation.

An ABC/Washington Post poll recently showed the administration’s approval rating at 38%, finally falling below 40%. With next year’s midterm elections coming up, the Democratic Party is hoping to regain its footing. If not, the party is likely to prematurely become a lame duck.

However, if the U.S. really wants to lower the price of gas, all it has to do is push for domestic shale oil development, but the environmental advocates within the Democratic Party will not let this happen.

The development of fossil fuels is “evil.” Therefore, Biden is seeking to release strategic stockpiles of oil and asking Middle East oil producers to increase production. But oil-producing countries are not stupid. Since there is a possibility that COVID-19 could spread again, they will probably maintain the production limits and take advantage of the current oil price of around $80 per barrel for as long as possible.

If you hate me more for saying this and are complaining about gas prices at 170 yen per liter or $3 per gallon, you had better forget about decarbonization, and switching from gasoline-powered vehicles to electric vehicles. Carbon neutral in 2050 is not a goal that can be achieved without commitment.

The decline in the Biden administration’s approval rating is due to a combination of factors. The number of COVID-19 infections increased again over the summer because of the lack of vaccination. The fall of Kabul highlighted the inadequacy of American foreign security policy, and Congress has been stalled not only by the majority and minority parties, but also by left-wing vs. moderate-wing conflicts within the Democratic Party.

However, recent high prices present a more straightforward drag on the administration and the U.S. economy, with the consumer price index rising 6.2% in October over last year.

Since prices are reported annually, it is natural that this year’s data will be higher than last year’s data, when prices were low due to the decline in demand caused by the COVID-19 pandemic. That is why the Fed called inflation a temporary phenomenon. In October last year, the consumer price index had already increased by 1.2% over the same month a year earlier. Since then, last October’s CPI was 6.2% higher than the previous year, so it’s no longer “temporary.”

The Fed’s confidence in Chairman Jerome Powell began to waiver due to his misreading of the situation.

3 Reasons Why Prices Continue To Rise

Why do prices continue to rise? The first reason is an overheated state of personal consumption. The U.S. government under COVID-19 has begun to act on a large scale, including providing benefits. In the case of Japan, it is said that 70% of the benefits it provided to people went to savings, but Americans spent theirs.

Before people stopped eating out, traveling and going to the gym, they bought a lot of things. By the way, they bought stock.

It is simple to click and order a product on your smartphone, but the seller must deliver the product. So the demand is virtual, but delivery is real. This asymmetry has caused supply chain problems.

The West Coast of the United States is swarming with container ships from China. Because of a slowdown in cargo handling, goods are not reaching consumers, and container ships are stalled. This year, empty containers are being returned to Asia, but now there is a shortage of truck drivers. These problems will be solved eventually, although it will take some time.

The second reason for the increase in prices is the increase in international commodity prices during the recovery process from COVID-19. In particular, the rise in energy prices is remarkable. The reason for this is largely due to the hastily imposed decarbonization policy.

So-called environment, society and governance investment has made it difficult to spend money on fossil fuel development. The energy industry has no choice but to stop long-term development investment. That raises the price of oil and natural gas. OPEC and Russia are pleased. The use of renewable energy, on the other hand, does not spread so rapidly. Moreover, it is not easy to use.

The increase in fuel prices will also directly affect the prices of other international commodities such as grain. As you know, prices on soy products are rising in Japan. The 26th session of the Conference of the Parties to the U.N. Framework Convention on Climate Change has just ended, but this situation will not change as long as we continue our linear approach to decarbonization policy. This means that Japan needs to also be wary of imported inflation.

The third reason for price increases is that the cost of labor has risen. People have been critical of the fact that the slow recovery of employment in the U.S. is due to the excessive amount of unemployment benefits added to the stimulus package. Although the benefit expired in September, there are still many people who have not returned to the labor market.

Therefore, the labor force participation rate has not returned to pre-COVID-19 levels. There are elderly people who have completely retired due to the COVID-19 disaster. Some people have changed their outlook due to the prolonged lockdown. Selective unemployment is increasing, as people value time with family over work, reject long commutes or seek work under better conditions.

As a result, employers are being forced to raise wages. Well, that’s America. If workers are serious about increasing wages, they should be able to do it on their own without relying on the beneficence of their employers to increase income by sharing increased profit.

On the other hand, some observers believe that Americans, as expected, will gradually return to work as their savings dwindle. The truth is that whether or not wage inflation continues will depend on what happens in the future, including the state of the COVID-19 pandemic.

What If Director Lael Brainard Becomes Fed Chair?

As this article goes to press, the Fed is expected to appoint Powell’s successor, as Powell’s term expires next Feb. 3. At the moment, there is a 50% chance Powell will stay on. Biden may choose to keep Powell if he is happy with the status quo, or choose Lael Brainard if he needs to appease the left wing of his party.*

That said, Brainard is believed to be more dovish than Powell. It’s an old word, but there’s no other way to say “inflation fighter.” And the Biden administration, which won passage of the $1.2 trillion infrastructure investment bill in a bipartisan vote, is poised to win approval of an additional $1.75 trillion in the Build Back Better bill.

To what extent should the market factor in the risk of inflation? The season will continue to be troubling for some time to come.

*Editor’s note: President Biden nominated Jerome Powell to another four-year term as Federal Reserve chair on Nov. 22.