To understand inflation, it helps to be old. I’m old. And the COLAs I’m talking about in the title of this post are not Coca-Cola or even RC.1 They’re “cost of living adjustments.” And they are back, not just in labor contracts but in commercial contracts, too.
When I was a lawyer working for a corporation (starting in 1978), the contracts I reviewed almost always had inflation adjustment clauses, unless they were for something that was going to be delivered or done really soon. Sometime in the late ‘80s or maybe early ‘90s, these clauses started to disappear – because they weren’t necessary anymore. Well, they’re back.
“To hedge against future price increases, Elaine Bell Catering has started to include an inflation rider in new contracts. ‘We’re giving them the best price we can if they were having their event today,’ Mr. Merritt added. ‘But where we are booking things 18 months out commonly, we have to price this more like a long-term labor contract that has a CPI adjustment.’”
I don’t know if the key to inflation is money supply or inflation expectations or some combination of the two (maybe with other factors included, too).2 But, regardless of whether inflation expectations cause inflation, they certainly are an indicator of where businesses think inflation is going. Which means we’re in trouble because you only have COLA or CPI-adjustment clauses in commercial contracts if businesses think inflation is going to be around a while and think it’s going to be high.
Last year, Federal Reserve Chairman Jerome Powell was saying inflation was transitory, as were people in the Biden administration. It looks like they were wrong. We just don’t know how wrong they were.
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1 See here and here.
2 I do tend to think that, per Milton Friedman, increases in the money supply have a lot to do with it.
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