Inflation in the United States Is Far Worse Than You Realize
There are three primary causes of inflation, government spending, quantitative easing, and zero percent interest rates.
News & Commentary
Inflation soared to a new 40-year high last Wednesday. The Consumer Price Index (CPI), which is used to measure inflation, rose to 9.1% year-over-year, reaching its highest level since November 1981. The rapidly increasing inflation rate is adversely impacting the purchasing power of all Americans. In the last year, gasoline prices have increased 59.9%, energy prices are up 41.6%, food prices have increased by 10.4%, airfare is up 34.1%, and brand new vehicle prices are up 11.4%. Since President Biden took office in January 2021, on average, each American worker has lost $3,400 in annual wages due to inflation.
All of the news surrounding inflation is grim. However, the situation is far worse than most individuals realize. This is because the public is being intentionally misled regarding the severity of inflation. Currently, the federal government manipulates the CPI to provide artificially low inflation numbers. The Bureau of Labor Statistics, in 1998, substantially altered its method for calculating the CPI. The previous CPI model measured an objective basket of goods. Since 1998, the CPI has represented a malleable basket of goods. Certain items can be cherry-picked, or substituted out, to reduce the rate of inflation artificially. For example, if the price of steak substantially increased, the Bureau of Labor Statistics could replace steak with chicken to produce an artificially lower inflation rate.
As economist Peter Schiff points out, under the current CPI calculation, "the government can basically create an index that outputs whatever it wants." Therefore, while the official CPI of 9.1% is the highest inflation rate in over forty years, the actual inflation rate is significantly higher. If the CPI were measured accurately, under the old model, the inflation rate would be just above 17%. Peter Schiff agrees with this assessment. In early June 2022, Schiff argued that "if measured properly," the actual CPI "is closer to 20%." The Biden administration is artificially lowering the CPI to avoid political repercussions. The problem for Biden and congressional Democrats is that their manufactured inflation rate is still a whopping 9.1% and trending upward. The fact that they cannot even produce an acceptable inflation rate by lying shows precisely how bad the problem is.
There are three primary causes of inflation, government spending, quantitative easing, and zero percent interest rates. First, unprecedented federal government spending has played a significant role in our current inflationary cycle. The federal government pumped trillions of dollars into the economy. Congress initially ramped up spending to fund Covid-19 stimulus measures. However, the Democrats have continued approving unprecedented federal spending long after the pandemic ended. Federal pandemic spending included the "$2.2 trillion CARES Act, passed in March 2020; the $2.3 trillion HR 133, passed in December 2020; and the $1.9 trillion American Rescue Plan, passed in March 2021." In addition to Covid stimulus spending, Congress approved many other spending bills, such as the Infrastructure Investment and Jobs Act (IIJA) of 2021, which will cost at least $1.2 trillion; and the $1.5 trillion omnibus spending bill in March 2022. This rapidly expanding pool of money, chasing fewer goods, inevitably leads to inflation.
Unfortunately, government spending is just the tip of the iceberg. The Federal Reserve (the Fed) has heavily relied on quantitative easing to manipulate the economy. Quantitative easing occurs when the Federal Reserve prints money to purchase government bonds. The goal is to reduce interest rates and stimulate the economy when the financial market slows down. Quantitative easing is incredibly problematic because it requires the Fed to place more money into circulation, directly causing inflation. The Federal Reserve has done significant damage to the United States economy through this practice. The most concerning aspect of quantitative easing is that the more it is utilized, the more reliant our economy becomes on it.
The Federal Reserve's zero percent interest rates further exacerbated the inflation issue. For two whole years, from March 15th, 2020, to March 16th, 2022, the Federal Reserve's interest rates were set at 0-0.25%. This zero percent interest rate was entirely unnecessary. By implementing a zero percent interest rate policy, the Federal Reserve decreased borrowing costs and incentivized spending by effectively increasing the money supply. That was an illogical decision, considering that we were not in a genuine economic downturn due to the Covid-19 pandemic. Instead, it was an artificial dip in the economy, exclusively due to lockdown measures. Lifting the Covid lockdown measures would have immediately resolved the economic decline. The Fed should not have taken any action, allowing for a natural recovery. Unfortunately, the Fed would never pass up an opportunity to wield the most power possible. Today, we are paying the price with sky-high inflation rates.
The best way to reduce inflation going forward is for the Federal Reserve to raise interest rates. Raising rates limits the money supply and discourages spending by consumers and businesses. The Federal Reserve, since March 2022, has raised rates three times, for a total of 1.5% or 150 basis points. The Fed is expected to raise interest rates by another 0.75% or 75 basis points later this month. Still, that is entirely insufficient to quell this inflationary cycle.
The Federal Reserve's current plan of incrementally increasing the interest rate is predicated on the misguided belief that the Fed can lower inflation and simultaneously prevent a recession. The Fed's approach will drag out the recession, creating an elongated financial crisis. This approach is wholly ineffective, as evidenced by the 9.1% inflation rate we are currently facing.
The correct response is to increase the interest rates dramatically. Ultimately, that will cause immediate and severe economic pain. However, it would reduce inflation and allow the impending financial crisis to end substantially sooner. To quash inflation, the Federal Reserve needs to raise interest rates higher than the current inflation rate. As previously mentioned, the official CPI is 9.1%, theoretically meaning the Fed needs to raise rates higher than 9.1%. In reality, due to the manipulation of the CPI, the true inflation rate is around 17%. To properly correct the current economic situation, the Fed should raise interest rates to above 17% until inflation has subsided.
Ultimately, a recession is inevitable. We cannot avoid the consequences of frivolous federal spending, quantitative easing, and zero percent interest rates. The Fed must shift its focus to limiting the length of the upcoming recession. Immediately raising interest rates above the inflation rate is the most effective way to achieve that goal.
Garrett Gillespie graduated Magna Cum Laude from the University of Central Florida with a Bachelor of Arts degree in political science.
The Gillespie Report is a weekly news and conservative commentary column written by Garrett Gillespie. Subscribe to receive the newest edition each week for free.
Excellent article highlighting the three primary causes of inflation and the correct response toward reducing inflation.