In our book Revolt!, we warn that inflation may well be the dominant legacy of the Obama presidency. While he had Bush’s help in creating high unemployment, he has driven us into inflation all on his own.
The latest data indicates that prices soared in March at an annual rate of 6.5 percent, by far the highest increase in decades. Half of the increase was in energy prices and one half point in higher food costs. While the Federal Reserve Board focuses on the “core” inflation rate, that excludes these volatile items, American consumers dip into the same pocketbook to pay for food and fuel that they use to pay other prices.
And there is little likelihood of any leveling off of the prices of either food or fuel. The former is driven by the use of food for energy, diverting corn and other food crops from nutritional use. The later is animated by the instability in the Middle East and North Africa, an international crisis that is likely to worsen in the coming year. Indeed, should the disease that has brought down regimes in Egypt, Tunisia, and Yemen and is fighting to topple them in Bahrain, Syria, and Libya spreads further into Saudi Arabia, we could face huge increases in energy costs.
And don’t forget the likely upward pressure on interest rates. The Fed is likely to end its QE-2 (quantitative easing 2) program in June. No longer will it buy mortgage backed and Treasury securities from banks into order to pump more money into the system. Once the printing press stops, the Treasury will have to start borrowing real money from real lenders and pay real interest. It will no longer be able to borrow back the money the Fed prints at nominal interest rates. With Washington needing to borrow $40 billion a week to finance its deficit, the upward pressure on interest rates will be severe.
Then, there are health insurance costs. With the onset of the requirements of Obamacare, the increase in premiums has averaged twenty percent, further raising costs of business.
Faced with these increases in fixed costs, businesses will have to raise prices. But nobody will be able to pay them because the economy is terrible. That will trigger a loss of customers and ever higher prices to make up the gap. This stagflation cycle is now upon us and will wipe out any gains that the so-called recovery may offer.
Annual inflation of 6.5% is just the beginning, just like $5 gas is just the beginning. The inflationary forces Obama has unleashed by his record deficits and his virtual tripling of the money supply will batter the economy with a violence that will make his re-election impossible.
The storm is just starting.