If you think inflation is bad in America, look overseas.
An economist for the Bank of London recently made headlines by stating the obvious - that stagflation will be the end result of increasing prices leading to increasing wages, which in turn lead to increasing prices. Of course, the press, wanting some click-bait, headlined this as "Britons need to get used to being poor" or some other sort of claptrap.
I lived through this from the 1970's through the early 1980's. The price of gas shot through the roof, thanks to the Arab Oil Embargo, and as a result, the price of everything else went up as well. As one of my professors at GMI pointed out, if you factor in the fertilizer (made from oil) needed to grow corn, the cost of electricity to run the milking machines and light and heat the barn (from oil-fired power plants - common back then) as well as the fuel needed to bring the milk to market, the electricity to run the bottling plant, the refrigeration costs of the display cases - and so on and so forth - it takes about a half-a-glass of crude oil to create one glass of milk.
In other words, our entire economy was based on cheap oil and the cost of oil directly affected the price of everything. In response to these price increases, workers went on strike (in an era where most blue-collar labor was represented by unions) for more money. Why should they experience a decrease in their standard of living because the cost of a basic commodity went up? And since strikes were crippling, companies caved in, passing on the higher cost of labor in the form of higher prices.
At the start of the 1970's, you could buy a stripped Vega or Pinto for $2000. By the end of the decade, these prices had easily doubled - along with the price of everything else. Gas went from 25 cents a gallon, to 50 cents and then the unheard of dollar. Gas pumps had to be modified to handle that extra digit. That was on a good day when the gas station had gas.
A similar thing is going on in the UK right now. This time around, it is natural gas that is the culprit - powering everything from home heating to electric plants. And as the price of gas goes up, homeowners see the cost of heating their homes skyrocket. And the price of other goods skyrocket as well. In response, workers go on strike or demand higher wages. No one wants to see their standard of living decline, just because a commodity becomes more scarce.
But the same effect happened in the 1970's and early 1980's. Wages went up, so costs went up and then prices went up. It doesn't buy you more natural gas, however. Since people have more money, they are willing to pay more, and since the price of gas (or gasoline) is based on scarcity, the net effect is a zero-sum game (am I using that term right, readers?). No one comes out ahead, other than maybe the union worker treads water and stays in place, while the non-union worker or small businessman drowns. No one comes out ahead.
As inflation spirals out of control, the system goes into a feedback loop. People demand more money for work, which in turn raises prices, which in turn causes people to demand more money for work. It doesn't increase the supply of gasoline in 1979 or natural gas in 2023.
So what happened in America? How did we break this viscous cycle of stagflation? Well, in part, we did accept that we were a poorer nation. We gave up our "full sized" American cars and downsized to vehicles which today, seem ridiculously small and dangerous. Americans traded in their Plymouth Fury sedans for something called a "K-car" which gave better fuel mileage. Some called it the "malaise era" but it was an era of scrimping and saving.
To counter high heating bills, people bought wood stoves and cut down trees. Whether this saved any money is debatable, but it did make a dent, for a while. What changed dramatically was how we set the thermostat. Back in the 1960s, it was set at 72 degrees, day or night, summer or winter. That was considered "comfortable." We learned to experience a wider range in temperatures - and put on a sweater when we got cold.
We also had to learn to shop at discount or "big box" stores, rather than the local supermarket. The cost of food was skyrocketing and like it or not, we had to conserve. People started buying poverty foods - and things like peanut butter soared in price simply because people were buying more of it. It was about that time, as I recall, that the Raman noodle made its appearance in America, starting out as something called "Lipton Cup 'O Soup."
The price of oil started to drop as we decided not to piss off our Arab neighbors so much, and as happens to all cartels, some countries started cheating on quotas. Slowly but surely, it was "Morning in America" in the 1980's, and by the time Clinton took office, the economy was booming again. Gas went to as low as 79 cents a gallon - cheaper than it was in 1969, if you factor in, inflation. We started driving small, truck-based SUVs and pickup trucks, which, over time, morphed into the monsters we see on the road today. We are right back where we started and learned nothing from the experiences of the past.
And once again, people are outraged that maybe their standard of living is in the decline. Many have yet to notice it - hitting the "snooze" button by adding more and more to their credit card debt. Eventually, though, they will wake up and realize things have changed and boy will they be pissed - but not at themselves or the right people, of course - or even realize that "shit happens" in life, due to factors outside of anyone's control.
It isn't so bad in America just yet - our European friends have it much worse. With the war in Ukraine, gas shipments from Russia are hard to come by and the price of gas has skyrocketed. We whine about putting gas in our monster trucks. They complain about having enough to eat. Whole different head.
Of course, people living on fixed incomes or savings, such as retirees, can really be screwed by inflation. If you have your money in stocks, it is a mixed bag. Many stocks have gone down in value, particularly speculative "tech" stocks. But others are seeing record profits, which many think is scandalous. Of course, if prices are at an all-time high, and profit ratios track retail prices, those, too, will be at all-time highs, at least for a while, until people stop spending.
Maybe that is what our Economist friend at the Bank of London was getting at. So long as we pretend nothing has changed and just jack up wages to offset increases in prices, the law of supply and demand will be subverted. And like a rubber-band, the further we stretch this out, the more it will hurt when it snaps back. If people cut back on spending, retailers have no choice but to cut prices. It may not happen overnight, but it happens, eventually, no matter what the product or commodity is.
These snap-back scenarios are particularly painful for folks who bought big-ticket items, like houses, at the height of a market. So long as people keep paying ridiculous prices for houses, houses will sell for ridiculous prices.
The good news is, it only takes a small change between supply and demand for prices to change dramatically. A 1% change in the balance between supply and demand can easily cause a 10% change in prices - up or down - as products or commodities remain unsold, or buyers remain unfulfilled.
We have, indeed, seen this happen before.
