- Paul Constant is a writer at Civic Ventures and the cohost of the "Pitchfork Economics" podcast.
- He said inflation is measured using a "market basket" of goods and services.
- The CPI can't fully explain inflation's rise — some price increases go to corporate profits, he says.
The media often reports on a single monthly "inflation rate," as though prices always rise by a uniform number across the board.
But when inflation rose by 7% in December, that didn't mean that every item in your grocery basket — to say nothing of haircuts, movie tickets, lawnmowers, and paperclips — increased by exactly 7% over the past year.
The federal government tracks and reports the inflation rate through something called the Consumer Price Index, which builds a "market basket" from a wide variety of goods and services in locations around the country and then runs the numbers through a complex weighting process to come up with the monthly average. Drew Desilver at Pew Research Center wrote a great deep dive explaining this process last month.
Our own experience as consumers informs us that prices on various goods and services are rising, and the inflation rate, derived from the CPI, confirms that our experience is true. But what the CPI can't explain — at least, not fully — is how and why inflation is rising.
The first thing to note is that inflation isn't just a problem in the United States
Virtually every nation in the world is struggling with skyrocketing inflation rates, though the rate is increasing higher in the US than in most nations. The United Kingdom, for example, reported a 5.4% inflation rate in December.
The reason for this universal price hike is relatively simple: The pandemic shut down the global supply chain, which then caused a worldwide traffic jam for goods ranging from auto parts to semiconductors at the exact same time that demand for goods like electronics and home-improvement items increased for hundreds of millions of locked-down consumers around the world.
Chad Stone at the Center on Budget and Policy Priorities, a progressive think tank, among others, believes that inflation is largely the result of global consumer demand switching almost overnight from services to goods during the pandemic.
The second thing is that even if supply-chain problems were completely smoothed out over the next few months, inflation is still likely to be a big problem in the US for at least the next year
That's because rents and shelter costs, which make up a third of the CPI's "market basket," are soaring right now.
As Zach Silk writes in the most recent issue of The Pitch, the sister newsletter to the "Pitchfork Economics" podcast, "The average rent in the United States is nearly $1,900 a month, an increase of nearly $300 over this time last year — and that's the average, remember, while some cities like Miami have seen a 40% year-over-year increase of rents."
Economists warn that due to a variety of complex CPI aggregation issues, even if every price in America magically stopped rising tomorrow, rising rents alone would continue to drive up the overall inflation rate for the next year or so.
The last point to keep in mind with inflation is that, like everything else to do with the economy, those rising prices aren't established by some objective, all-seeing, all-knowing "free market" that assesses every aspect of the economy and sets prices accordingly.
In fact, a good number of the rising prices we're paying weren't strictly necessary at all
During the last quarter of 2021, for example, Starbucks reported an eye-popping 31% increase in profits, and revenue increased for the quarter by almost 20% to just over $8 billion. On the same call that Starbucks announced those terrific numbers, the corporation also announced that it would raise its prices over the next year — probably more than once.
The company blamed "supply-chain disruptions" and higher costs for labor for the price hikes, but Jake Johnson at media nonprofit Common Dreams said that they didn't mention one raise in particular: Starbucks CEO Kevin Johnson's pay increased by almost 40% last year to more than $20 million.
It's not just Starbucks: Many American corporations see inflationary panic as an opportunity to boost their profits. The Wall Street Journal reported that Todd Kahn, the CEO of luxury fashion brand Coach, even admitted that his company's "rise in [prices] isn't really about inflation … it's about reducing discounting."
Journalist Matt Stoller estimated that 60% of the price increases that ordinary Americans are paying are going directly to corporate profits, not to compensate for global supply issues or compensate for higher-priced goods.
Of course, none of this context about inflation helps the ordinary American consumer, who's paying more for everyday items
All those wage increases that have happened since the labor market turned in favor of workers last year weren't enough to keep up with inflation, which took a 2.4% bite out of the average American paycheck.
These inflationary stresses are a complicated global problem, and it's going to take a suite of policies — from using government muscle to help smooth out lingering supply-chain snags to combating shameless corporate price gouging and exploitative rent hikes — to push inflation back down to healthy levels.
But you shouldn't buy finger-pointing that tries to pin inflation solely on lockdowns, stimulus checks, or other policies that were passed to help keep Americans safe and supported through the worst of pandemic.
That's the worst kind of trickle-down fear-mongering — meant to keep workers angry with workers and everyone's eyes off the real profiteers.