The start of 2024 has brought a symphony of assurance from economic experts, the business media, Wall Street, Biden administration officials, and Fed leadership that inflation has been tamed and has run its recent short-lived course.
A range of economic metrics, excuses (what Milton Friedman once facetiously referenced as “special events”), and data are offered to bolster the premise and add an air of clinical objectivity.
Wishing something to be true does not make it so. Unfortunately, inflation has not been brought to heel and the opposite is true.
It’s not just one thing stoking inflation. Rather, there are three broad categories of individual contributing factors: government spending/regulation, monetary policy, and geopolitics. And specifically, there are twenty key contributors keeping inflation at elevated levels, and perhaps worsening it.
1. Unabated growth in the regulatory state makes everything more expensive. The administrative state is exponentially expanding at break-neck pace across all facets of the economy and across all industries. If you make, provide, sell, buy, use, or report something, the costs of compliance are growing at historic rates. Such costs inevitably will be passed down the supply chain, ultimately to consumers, in the price of goods and services.
2. Languishing worker productivity means more cost per unit of output. More constraints are being imposed upon worker efficiency and productivity. Remote work comes with an inevitable reduction of individual and team efficacies. New labor agreements come with hidden but onerous work rules, beyond wage rate hikes, that significantly impede productivity. Output per worker is declining, which will increase costs.
3. Generationally low worker participation rate creates skill scarcity. Worker participation rate has been declining for 25+ years. Pandemic made it worse, and it is projected to decline further in the coming years, to barely above 60%. The reasons are many, but lower participation manifests in lower economic productivity and higher costs.
4. Climate alarmism is making the kilowatt-hour expensive and scarce. Energy is a feedstock for everything used or provided in a modern economy. If electricity costs increase rapidly and electricity availability decreases severely, inflation is stoked. Climate change policies are designed to do both (along with forcing a heavier reliance on electrification).
5. Climate alarmism is making horsepower expensive and scarce. All commerce requires some level of transportation in its supply chain. The transportation sector is now state-controlled, where modes and rates are set by bureaucratic decree. Costs rise, productivity plummets (for a real-time example, look to California’s disastrous mandate of electric trucks) and choice declines; all feeding inflation.
6. Commodities will experience unprecedented demand levels that are impossible to supply and that will explode costs. Climate policies rear their inflationary heads once again, this time by mandating levels of wind, solar, batteries, and electric vehicles that require enormous quantities of lithium, copper, rare earths, nickel, aluminum, and cobalt. Quantities that cannot be commercially produced in any reasonable time frame, and that will manufacture tremendous inflationary pressures for each.
7. Hyper government spending creates private sector scarcity. The US federal government spends over $6 trillion a year, $2 trillion more than it takes in as revenue. That epic level of spending consumes vast resources in the economy, making everything more scarce and more expensive for the private sector to do its thing. Voracious government activity elevates inflation in the real economy, soup to nuts.
8. Entitlements grow wider and deeper, driving potentially productive components out of the economy and keeping them sidelined. Social programs have greatly expanded: Social Security, healthcare for all (Medicare and Medicaid), student debt forgiveness (and higher ed subsidization), universal income, unemployment benefits, ‘affordable’ housing, sanctuary cities and open borders, and so on. The scale and breadth swamp the economy with suboptimal government spending. Worse, the programs often discourage potentially productive contributors of the economy from participating, keeping them out (or pushing them out). None of this bodes well for controlling inflation.
9. Taxes are rising everywhere and for everything, and the tab will be passed on, through the stream of commerce. Government needs a stupendous level of new revenue to fund its ever-growing self. Existing taxes will rise, new taxes will be created, and some new taxes will parade around as something other than taxes. Across local municipalities, states, nations, and global bodies (hello UN, IMF, World Bank, etc.). For driving in cities (congestion pricing), sitting at events (stadium taxes), eating (restaurant taxes and surcharges), shopping online (digital taxes), turning the lights on (carbon taxes), owning a pet (dog license fees) and flushing the toilet (municipal sewer ‘fees’).
10. Crime and heightened security add costs to retail. Shoplifting and theft have become societal norms, from the ransacking of trains carrying packages to flash mobs stripping retailor shelves bare. Businesses are paralyzed with inaction, law enforcement is instructed to not pursue the criminals, and everyone accepts such behavior. Yet the consumer pays for the consequences, from the lost merchandise to the heightened security measures, with higher prices.
11. But before those goods can be swiped off the store shelves, state-sponsored terror is making global shipping of those goods riskier and costlier. Today’s global economy means even the simplest of products carry massive, complex cumulative supply chains behind them (the route from Shanghai to Rotterdam is 12,000 nautical miles and requires a month of sailing). Inevitably, links of that supply chain will rely on water transport, and water-borne commerce hasn’t been this risky since the Republic of Pirates. When a ship is attacked, sunk, diverted to a longer (but safer) route, or delayed, it will increase cost and feed inflation. Shipping also becomes much more expensive to insure and protect, which also boosts inflation.
12. War is breaking global supply chains and commerce flow. War has never been conducive to global supply chain efficiency, but today’s geopolitical heat map is especially devilish. Consider Iran as an example: western climate policies shutter domestic energy and create reliance on Iranian energy, which creates market volatility and higher prices for oil, which benefits Iranian revenues, which allows Iran to fund terrorism, which provides the backing for terrorists to attack nations and global shipping, which disrupts supply chains, which drives up prices and scarcity more. Viola, spiraling inflation. And such a dynamic doesn’t apply exclusively to the Mideast and oil. Same cycle for war in Ukraine with grain and a potential war in Taiwan with semiconductors.
13. Deglobalization of supply chains injects inefficiency and higher costs into the system. Today’s global supply chains came to be because of efficiencies and economic advantages (whether built fairly or unfairly) of each link. The evolution and optimization that took decades to evolve are now being broken, sometimes for good reasons and sometime for bad reasons. Nevertheless, breaking down globalization and replacing it with regional or national supply chains is going to necessarily result in higher cost, less choice, and greater inflation.
14. And the links in those supply chains are becoming dangerously thin and unreliable. Decades of just-in-time manufacturing optimization have been applied to every link in very long global supply chains, resulting in over $90 billion in annual cash flow savings for US firms alone. That has gone from strength to weakness with today’s geopolitical volatility and deglobalization shift. The once desirable is now brittle. When one link can’t deliver its piece of the puzzle just-in-time to the next link, the end-results are delayed delivery, higher cost, and inferior effectiveness: hallmarks of inflationary pressure.
15. Economic policy favors consolidating supply and markets into a small group of large entities, creating oligopoly power. The current policy, economic, and geopolitical environment benefits scale in firms and industries. Scale and concentration allow the few to dictate the supply and price of products to the market down the supply chain, ultimately impacting the price of everything from breakfast cereal to smart phones. Once higher prices are established, the oligopoly will be resistant to both new entrants and price discounting. Inflation appears, and once present, persists.
16. Speaking of market power, OPEC is back from the dead as OPEC+, bringing with it monopoly pricing power for oil. What capitalism and innovation slayed with the shale revolution, western climate policies resurrected with draconian prescriptions. Oil is once again controlled by the few, with most of the few being adverse to the US. Since oil is a necessary feedstock for countless products and services in a modern economy, higher prices for oil mean higher prices for everything, which means inflation.
17. The Federal Reserve, despite touting its independence, is quite susceptible to political pressure and may set rates too low. Fighting inflation at central banks is never a fun or popular endeavor, as monetary policy adjusted to a more disciplined path creates short term headwinds and hardships for stakeholders. Politicians worry most about…their popularity…and the short term. That makes for a head-on collision between political leader ‘wants’ and monetary policy ‘needs’ during inflationary times. Don’t be surprised if the Fed folds and acquiesces to the politically expedient when it comes to choosing between what is clinically needed and what avoids criticism/outcry. That could result in too-low interest rates (or cutting rates prematurely), effectively pouring gasoline on the already raging inflation bonfire. For more on the Fed in 2024, listen to The Far Middle episode 136, starting at approximately the 20-minute mark.
18. And the Left (who runs government these days) loves free money, which is an inflation accelerant. Whether it is under cover of impressive-sounding Modern Monetary Theory (MMT) or just plain socialism, the Left sees free money and negative real interest rates as key tactics to reward the favored special interests at the expense of savers/value creators. The Fed buying Treasuries is another tactic utilized here to attempt to keep rates below market. Free money diverts capital flows into funding inefficient activities that crowd out more efficient endeavors. That’s a recipe for inflation.
19. But even with love of free money policies and an impressionable Fed, the cost of debt is inevitably increasing the cost of capital. The party is over for zero interest rates. The benchmark cost of debt set by central banks and the risk premiums above it are being reset toward more normal levels (although still nowhere near normal levels). Capital is still artificially cheap, but no longer free, and capital is the lifeblood of all economic activity. Thus, the products of all economic activity will reset to a higher cost level.
20. The confluence of the prior nineteen contributors creates an incremental, cumulative step-up of inflation. Although each of the prior factors will individually contribute to sustained and perhaps increasing inflation, all in combination will drive an incremental step-up of inflation. A cumulative effect that occurs when all these contributors manifest together.
If you doubt the list above, consider the past few years. Are you waiting longer for goods and services today? Have the costs of everything gone up or down? Has quality improved or degraded? Do you have more choice today or less?
And do you suppose the situation will improve or worsen from here?
No matter how bleak your prognosis view may be, there is still time to course correct. Fyodor Dostoyevsky wisely advised that, “To live without hope is to cease to live.” Let’s hope by advocating for actions that tame inflation so that we all may live better.
























