The rising prices of food, gas and other things we buy — in other words, inflation — were already a central economic issue of 2021. Those prices are up 6.2 percent over the last year, and shortages and other inconveniences are side effects of the problem.
Now inflation is also a central political issue. It is dragging down President Biden’s approval ratings and fueling discontent among Americans. It’s clear in surveys. It will surely be the talk at the table of Thanksgiving family gatherings next week (even if, as an economics writer, I might prefer to skip one day of talking about supply chain mechanics).
How did we get here? Who is to blame? To help you understand, today I’ll walk you through the most obvious candidates — and where the evidence looks strongest.
Presidents have less control over the economy than headlines might suggest, but the current situation is an exception to the rule. You can draw a direct line from a specific policy decision that Biden and congressional Democrats made this past winter to some of the inflation happening now.
In designing the stimulus that Congress passed in March, Biden’s administration went big, with $1.9 trillion in pandemic relief — on top of a separate $900 billion package that passed three months earlier. Put the two together, and $2.8 trillion in federal money has been coursing through the economy this year while economic activity has trended only a few hundred billion dollars a year short of what mainstream analysts would consider full health.
If you think of inflation as a result of too much money chasing too few goods, then this extra spending is most likely a culprit.
But for all the trillions spent, Americans’ purchases through the end of September were only about $52 billion higher — or 0.4 percent — than would have been expected in a world where the pandemic never happened. I take that as evidence that most of the spending served to replace lost incomes (from people not working, voluntarily or otherwise) or was plowed into savings, and the inflation story is more complicated than just too much money floating around.
The nation’s central bank has kept ultra-easy monetary policy in place for far longer than in past economic cycles. Its chair, Jerome Powell, has focused on returning the job market to full health and has projected that the inflation surge is temporary.
His response in large part took from the lessons of the last economic expansion, when the Fed started raising interest rates at the end of 2015 and, with hindsight, might have excessively crimped a recovery that was only starting to show big benefits to workers.
But Powell and other policymakers might be fighting the last war. At a minimum, the Fed has not played its traditional role of pre-empting an inflation surge by deliberately slowing the economy.
That said, monetary policy takes a long time to affect consumer prices, so it’s not a given that the inflation situation would be terribly different now if the Fed had started raising rates already.
When the pandemic shut down the world in 2020, operations managers at companies concluded: We need to do whatever we can to survive.
Automakers saw it as a severe recession and cut back production and orders for new supplies, while car rental companies sold their fleets. Airlines canceled orders for new jets. Energy companies canceled drilling projects. Companies in a range of industries laid off workers.
We’re still dealing with the effects of those decisions. This turned out to be a much shorter economic downturn, with a much speedier recovery, than many people were forecasting in the spring of 2020. So now, automakers are wishing they hadn’t canceled orders for semiconductors, car rental companies are struggling to add vehicles, shipping prices are through the roof, fuel prices are spiking, and companies are wrestling with labor shortages.
What seemed like prudent, sensible decisions turned out to be wrong for the actual economy we ended up with.
Despite all that, however, supplies of many goods actually are higher than they were before the pandemic. The problem is that demand is up even more.
All of us
Though everybody experienced the pandemic differently, in the aggregate a couple things are true.
We shifted our spending toward stuff, rather than services. Americans purchased 18 percent more physical goods — cars, washing machines, furniture — in September than they did in February 2020, while their consumption of services fell a bit. Because demand for such goods is off-the-charts high while supplies are limited, they are more expensive.
And many of us elected to stop working, or work less. (The number of people working remains smaller than it was prepandemic.) The shortage of workers has led employers to offer higher wages to attract employees. That fuels price increases even in services experiencing underwhelming demand, like restaurant meals.
The great shift in Americans’ purchasing and employment patterns prompted by the pandemic look like the primary culprit in this bout of inflation. Decisions by Biden and the Fed likely contributed, and earlier decisions in the corporate world made it harder for supply to adjust to match surging demand.
In assessing blame for the wave of inflation, the biggest question is whether policymakers should have foreseen the problems around reopening — and perhaps been more restrained in trying to stimulate the economy.
That means the future of inflation depends not just on what happens in Washington, but on what happens with the pandemic — and how quickly Americans return to more typical spending patterns and more people go back to work.
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