Inflation is the topic of the month in our solutions journalism show, “Solutionaries.”
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I chatted with Michael Greiner, an assistant professor of management from Oakland University’s School of Business Administration, about what exactly is happening with the auto market right now. You can read that piece here: Inflation and car prices: What’s going on? How did this happen?
Greiner provided some important context on inflation and our U.S. economy in broader terms as well (meaning, outside of just the car market).
Here are five things I learned from our conversation:
1. Inflation isn’t new, and the dollar isn’t backed by anything specific right now (like gold).
It feels like everyone’s been discussing inflation lately, especially considering the rise of gas and grocery prices. But this isn’t new, is it?
Not at all.
“No, it’s not at all new,” Greiner said. “In fact, really, what we’ve been experiencing for the past 40 years is the exception rather than the rule. In the past, the United States had established itself as what’s called a Fiat Currency, where, essentially, the dollar isn’t backed by anything specific, other than just the faith that people have in the American economy. It used to be that the dollar was backed by gold. And so, what would happen is, the gold price would essentially anchor the dollar.
“So you had periods where the economy would be doing well, and then it’d go down. It’d be a yo-yo effect between inflation and recession, back and forth. It was a constant process. It’s really only been for the past 40 or so years that we haven’t been experiencing that.
“We’ve become very complacent, in a way, about inflation, but the reality is, it’s something that’s really very common if you look at the whole history of the American economy.”
2. Energy prices and food prices aren’t included when the government looks at inflation.
“Interestingly enough, when the government calculates inflation figures, they actually exclude energy prices, and food prices for that matter, because they tend to be very volatile,” Greiner said. “But what they’ll do is, they’ll look at the Cost of Living Index, or Consumer Price Index, and they take a basket of goods, of what they expect each consumer will buy on average, and then they look at how that basket of goods has increased in price, relative to what it was a year ago. And then that determines what the inflation rate is. And again, that does not include energy or food, because those things can bounce around a lot.”
3. Gas prices might seem high right now -- but they’ve actually been worse.
“There’s been a lot of attention on energy lately, but the reality is that right now on a REAL basis … and what that means is, if you use the amount that a dollar would buy today, relative to the amount a dollar would buy 10 or 20 years ago (or how much fuel would it buy), it turns out that we’re actually not at the highest that fuel has ever been,” Greiner said. “In fact, the price of fuel back in say, the 2008, 2009 area, if you were to use today’s dollars, to calculate how much that was per gallon, it would have been above $5.
“Fuel is kind of a separate thing. What we really have then in addition to that is the issue of inflation. And inflation specifically arises as a result of the fact that we have an economy that’s overheated. Everything in our economy is based on supply and demand. And that includes money.
“So, the more demand there is for money, the more expensive it gets. … That means that its value basically goes up [and vice versa]. When the value of money goes down, then that’s when we have inflation.”
4. Perhaps Venezuela could be the answer when it comes to gasoline.
“Right now, President Biden is working really hard to try to open up the oil market in Venezuela. Venezuela, for a number of years, has been kind of isolated from the rest of the world as a result of having an authoritarian government there,” Greiner said. “And so, part of the sanctions that we’ve been imposing on Russia, we’ve actually been imposing on Venezuela for a number of years. Well, as it turns out, Venezuela has a lot of oil, so we want to get that oil started up again to essentially replace the amount of oil that now is not being contributed to the global economy by Russia. And that would help bring prices down.”
Greiner went on to say that the president has been working in particular with Chevron, which is the only American oil producer that still has a presence in Venezuela.
“They’ve said that they could increase production from Venezuela by I think 700,000 barrels a day, which would essentially replace what was lost by the Russian embargo. So there’s some interest in doing that. But this shows you that this is a global thing -- not so much (about) what’s happening locally.”
5. The only group, or party, that can try to manage inflation at all is the Federal Reserve.
“And the federal reserve, of course we heard (recently) that they’re increasing their target interest rate. And essentially by increasing that, their goal is to slow down the economy. The ratcheting up of the economy, that’s really what caused this inflation to start. If they could slow that down a little bit, then hopefully inflation would hopefully come down, as well. The concern there is, though, is that if they go too far, they could throw the American economy into recession. So that’s the balancing act right now the fed is trying to go through. We want to slow down the economy enough to bring down inflation, but not so much that people start losing jobs.”
Bonus: The U.S. isn’t in a terrible spot lately with inflation, even if it might seem that way sometimes.
Here in the United States, we’re a net energy exporter -- meaning we produce more than we consume. We’re also a huge exporter of agricultural products.
“So yes, inflation does mean we experience some unpleasantness when we’re car shopping or at the grocery store,” Greiner said.
But when you look at the overall economy, some of these factors actually help us in the U.S. For example, consider high oil prices.
“We produce more oil than we need here, and it’s the same thing with food,” Greiner said. “So, when prices go up on those things, there are certain segments in our economy that are actually benefitting.”