In Ernest Hemingway's 1926 novel The Sun Also Rises, one character is asked how he went bankrupt. “Two ways," the man replies, "Gradually and then suddenly." Something of this could be seen in Friday's Producer Price Index figures, which showed prices moving up more than twice as much as expected on a month-to-month basis in March. Compared with February, prices moved up by one percent, speeding past the four-tenths of a percentage point expected.
The numbers are even more startling on an annual basis. Annual inflation kicked up to 4.2 percent, the highest figure since September 2011. Of course, the crazy year of 2020 scrambles the signals a bit. Last year, we were headed into mandatory lockdowns in March, with businesses shuttered and people advised that touching a cereal box might contaminate them with the deadly China plague. Prices dropped in February and March. As a result, the year-over-year gains exaggerate how much inflation is really occuring.
But economists were well aware of this so-called "base effect" going into the month, and still they underestimated inflationary pressure. Fed chair Jerome Powell has assured us that any rise in inflation is likely to be “transitory," but if economists miss the size of the price gains, how confident can we be that they'll correctly forecast the duration of rising prices?
Price gains were particularly concentrated in energy and food. Gasoline prices rose 8.8 percent in March and are up over 50 percent compared with a year ago, when prices were depressed by people sheltering at home. Food prices rose half a percentage point compared with February and are up 5.1 percent compared with a year ago.
Food and transportation make up a far larger share of household expenses for families at the bottom end of the income ladder than those at the top. So the inflation we are experiencing is weighing particularly hard on the poor and working class. Biden, who ran on raising taxes only on the wealthy, is presiding over a regressive stealth tax hike on the bottom two quintiles of the income brackets.
Add to that the bad news on unemployment—jobless claims unexpectedly jumped much higher last week and black unemployment is back up at 9.6 percent—and it's clear that in these early months of the Biden administration, America is not moving toward more equality or opportunity. Stimulus checks that drive up the price of food and gasoline do little to help the poor. That should give some lawmakers considering the next $2.3 trillion spending plan Biden has put on the table at least a moment's pause.
Alex Marlow & John Carney
