Inflation Then And Now

Inflation is the highest that it has been in forty years. What I would like to do is compare inflation now to that in the late 1970s and early 1980s.

Inflation, a general increase in prices, can be caused by a number of factors. Whatever the cause the usual way to combat inflation is to raise interest rates, which makes borrowing more expensive. This has the effect of increasing the value of money, relative to that of goods, thus lowering inflation.

While the inflation of today brings back memories of forty years ago, I find that the root cause of the inflation is very different. What is interesting is that, while all of the western countries were wracked with inflation, forty years ago it was lower in America while today it is higher in America, when compared to other western countries.

The inflation of forty years ago was based on wages. Labor unions were powerful and kept pushing for pay raises. The result is that millions of well-paid unionized factory workers were earning more than their labor was really worth, according to the Law of Supply and Demand, and the economy adjusted by way of inflation. It is certainly no coincidence that inflation and the number of people working in manufacturing both peaked in the same year, which was 1979. 

Margaret Thatcher, in Britain, and then Ronald Reagan, in America, both went after powerful labor unions. A turning point for the power of unions in America was Reagan's firing of the striking air traffic controllers, in 1981. 

Both purposely induced nasty recessions because that was the only way to stop inflation. By the mid-1980s inflation had been tamed but Ronald Reagan unfortunately stuck to his rightward economic policies well after the problem had been solved, and that is what caused the market crash of 1987 by hindering consumer spending.

For decades the word "inflation" brought back memories of the late 1970s and early 1980s. Now inflation is back with a vengeance, but it's root causes are different.

Handing out money for pandemic relief is certainly among the causes of today's inflation, as is probably increases in the minimum wage in recent years. But the main cause of the inflation today is the cost of fuel. 

Forty years ago the cost of fuel was still low, but when fuel gets expensive it makes everything else expensive. When you buy an item at the store the price has to include the cost of transporting the raw materials to the factory, and then of transporting the finished product to the store. Forty years ago we had primarily wage-based inflation while today we have primarily fuel-based inflation.

Just as the recession of the early 1980s was artificially induced because it was the only way to stop inflation, we might wonder if at least part of the soaring cost of fuel is also artificial, for the purpose of pushing people to buy electric cars.

We can see that this is fuel-based inflation by the fact that it is generally higher in America than in other western countries, whereas forty years ago it was the reverse. Most other western countries, particularly in Europe, are geographically compact. This greatly lowers the cost of transportation when fuel gets expensive.

Canada and Australia are comparable to America geographically but the population of Canada is very concentrated along it's border with the U.S. making it, in effect, more compact. The population of Australia is heavily concentrated near the east coast, east of the Great Dividing Range, and the cities that aren't, such as Perth and Adelaide, are on the coast so that they are accessible by ship. The cities of America, in contrast, are geographically dispersed and far apart. That is why America leads in this fuel-based inflation. It costs a lot of money to move things from one part of America to another.