I read a Financial Times article in which an asset manager said that the Federal Bank (the “Fed”)has no way to address inflation except by crushing this, crushing that, and on and on. In the same article a portfolio manager is quoted saying that the Fed can’t do anything about supply chain alleviation, or a war in Ukraine.
I’d like to think that this is only half correct. I agree with the second statment: no, the Fed cannot do anything about our supply chain woes or an overseas non-US war. But we can, right. Let’s hash this out a little bit.
The Consumer Price Index
Pardon being too reductionist about this idea, but I’m trying to think as an economist. So the Consumer Price Index (CPI) is calculated by valuing the price of a basket of goods, with a baseline measure in early 1980’s dollars. As the goods in the basket change over time, a rate of inflation or deflation (or nothing) describes the changes.
Stop right there. Let’s not treat what I write next as a silver bullet, because the system of goods and factors of production are complex. But, what would it take to stabilize from influence the basket of goods? Are we asking this question? If we are, great, we need to push harder to create the economic and financial settings to generate CPI resiliency, and inertia.
But, again, let’s step back for a moment. What do we know?
- The CPI goods have been constant (as in the goods in the basket), and are influenced by any factor that can change price.
- Oil and gas just happens to be one good that can impact the CPI because much of our production methods use fossil fuels.
- And, the price of crude oil just happens to be rising (or already is quite high) because of global concerns and boycotts over Russia invading Ukraine.
- Russia just happens to supply a lot of oil, and at the same time, investors are spooked by this volatility and aggression.
So we have half the scene of this story. The other half goes by supply-chain challenges lingering from Covid-19, a great resignation, and that vicious cycle of inflation (again). All contributed to the rising cost of goods (think scarcity, limited labor, lagging supply chain, and then factor inputs that increase price).
The answer is SMACK RIGHT IN OUR FACES.
Here’s a theory about how we can prevent inflation levels and for those who just want to blame someone…politics isn’t going to help us here, and its moronic to blame any one thing. We need to address the basket of goods systematically, holistically. A combination of reductionist solutions with a holistic plan to cook the numbers so a level of inertia occurs in the CPI.
Yes this is a reimagination of the economy, turning it into a regenerative economy where we do more than just see price and return. We can use CPI as it is, but reframe the components to alter the outcome for health and sustainability instead of fear and worry.
How.
- Organic and regenerative farming increase the value of a good but are well proven to decrease the inputs necessary. What inputs? Oh fertilizer which just happens to be expensive, and probably connected to a lot of gas and oil use. So, reduce inputs, reduce CPI.
- Buy locally and create improved regional food systems will prove to reduce miles traveled and oil and gas use. Reduce inputs, reduce overall cost. Invest in energy services that do not need oil and gas inputs, and thus reduce long-term costs.
That is the easy part. We know how to create efficiency. But we need to recognize that a stable, less volatile CPI is indicative of sustainability; of a doughnut economics paradigm; of an economy that is in the right relationship with nature and people.
We need to do the above or every single item in the basket. We need to work down the scope 1, 2, and 3 inputs and ouputs and build resiliency into the system. If we care about these economic factors so much, time to actually do something about them.
Call to Action.
Let’s use the tools of economics that society has adopted, and influence them with the principles of sustainability, circularity, and regenerative economics. Let’s use the solutions proven to help, and scale them across the CPI sectors intentionally to mitigate inflation.
Hell, we don’t need to reinvent the wheel entirely. We need to open our eyes to the wisdom of the past as the technology of the future to bring about more consistency in our economy.
The CPI is just the start. GDP, investing…its all up for grabs now.
Downside.
Can this just create more inflation? Would more regenerative farming or less reliance on fossil fuels cause more inflation? Or, would discovering a method to incorporate efficient, smart, and money saving practices into our godly economic system, reap benefits elsewhere too? What are your thoughts?
