“Writing in The Wall Street Journal, the president outlined three policy choices to deal with an inflation caused, he seems to believe, largely by pandemic-related supply-chain obstructions and intensified by the war in Ukraine. His plan is simple: Continue to trust that one of the main architects of our current inflation, Federal Reserve Chairman Jerome Powell, will raise interest rates fast and high enough to tame inflation without crashing the economy, dispense more subsidies and tax credits, and let the deficit melt away—by some miracle—without cutting spending.
Absent from the piece is any acknowledgement of what readers of this column know all too well: that inflation was fueled by Biden’s own reckless spending policies, especially the $1.9 trillion American Rescue Plan passed in March 2021. Half a dozen or so studies have shown that fiscal policies implemented during COVID-19 are a main culprit behind today’s inflation. Biden also fails to mention the Fed’s overly accommodating monetary policy and its current slow response to inflation.
In other words, the president’s argument is amazing for its tone-deafness, inconsistent thinking, and sheer economic ignorance.”
“According to the U.S. Census Bureau’s supplemental poverty measure, the stimulus payments moved 11.7 million people out of poverty in 2020 — a drop in the poverty rate from 11.8 to 9.1 percent. And the 2021 poverty rate was estimated to fall even further to 7.7 percent, per a July 2021 report from the Urban Institute. We don’t know yet whether this came to fruition, but Laura Wheaton, a senior fellow at the Urban Institute and one of the analysts behind the 2021 numbers, told us that it was clear from their analysis that the stimulus checks were driving a dramatic decline in poverty.
More broadly, the stimulus checks also cushioned workers during one of the worst economic crises in modern history, which likely helped the economy bounce back in record time. In April 2020, when Americans were receiving the first round of checks — up to $1,200 with the CARES Act — the unemployment rate was at a disastrous 14.7 percent. But two years later, it’s almost returned to its pre-pandemic levels, with many job openings. “I hope we don’t forget how awesome it was that we supported people so well, and that we recovered as quickly as we did,” said Tara Sinclair, a professor of economics at George Washington University.
However, there is also evidence that the stimulus, especially the last round, likely stoked higher and higher prices for the very people it was intended to help. Though global supply chain issues (and, more recently, the war in Ukraine) have been significant drivers of inflation, the divergence between U.S. and European inflation suggests there’s more to it than that. In fact, a recent analysis from researchers at the Federal Reserve Bank of San Francisco found that the stimulus may have raised U.S. inflation by about 3 percentage points by the end of 2021.”
“Inflation is a general rise in the cost of goods and services. It can occur for two reasons: an increase in the supply of money relative to the supply of goods or an increase in demand for goods relative to supply. While not all price increases are evidence of inflation—prices also fluctuate based on supply and demand—a sustained increase in prices across the board is evidence that one of these phenomena is at play.”
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“Biden’s big spending bills weren’t enacted immediately. The ARP wasn’t signed until March 2021, and much of its spending occurred over several months. Likewise, the Infrastructure Investment and Jobs Act—another commonly cited source of inflationary pressure—didn’t pass until last November, and its spending won’t peak until 2026. Plus, a study by the Chicago Federal Reserve found that the ARP alone can only partly explain recent inflation.
Those findings shouldn’t be a surprise, because significant spending was underway before Biden ever made it to the Oval Office. Even before the Coronavirus Aid, Relief, and Economic Security (CARES) Act—the most expensive bill signed by Donald Trump—the federal government was spending unprecedented amounts due to COVID-19. This act included cash payments to most Americans, housing assistance, boosted unemployment checks, and a pause on student loan repayments, which was recently extended by Biden. These actions may have been necessary at the time, but such policies began under Trump and are contributing to inflationary pressures now.
Putting the pandemic aside, Trump spent extravagantly, spending more in four years than President Barack Obama did in eight. While Biden may be fanning the flames of inflation, Trump collected the kindling and lit the match.
Not that Democratic policies would have been better. They pushed for more generous “enhanced unemployment,” flooding states with cash, and near-permanent stimulus payments to parents. While only some of their ideas were enacted, the cash distributed didn’t disappear, and neither did additional spending by many blue-state governors.
And while the 2020 election happened alongside increasing prices, an expansion of the money supply occurred long beforehand. This is important because one cannot understand inflation without considering the Federal Reserve. No president controls interest rates or dollars in circulation: Jerome Powell and the Federal Open Market Committee do. And Powell admitted last year that they got inflation completely wrong.
The Federal Reserve isn’t the only central bank at fault. Just as worldwide governments spent generously on pandemic relief, the threat of recession made central banks across the world hesitant to raise interest rates in response to rising prices. The European Central Bank has kept rates consistent since early 2016. Meanwhile, the United Kingdom raised rates to where they were pre-pandemic, but like the Federal Reserve, the Brits lowered interest rates during the last two years.
Cheap credit might be appropriate when economies face unexpected shocks, but it becomes a problem once demand roars back. But even if central bankers and other policymakers weren’t following each other’s lead, there’s further reason to expect inflation to be spiking now.
Inflation in the Eurozone sits at 7.5 percent, and price levels in the United Kingdom look similar. To an extent, these phenomena occur independent of the U.S.—it’s ridiculous to suggest Biden’s inauguration sparked inflation nearly 3,600 miles away. But just as Russia’s war can impact the price of gas and wheat, the United States, too, can export inflation across the globe in an interconnected economy.
Breakeven inflation is now the highest it’s been in the 21st century, but blaming any one person or policy only captures part of the economic picture. In reality, many actions—some recent and some dating back five years—primed the pump and escalated a worldwide run-up in prices.
Just as no one person caused our current predicament, it’s unlikely any one person can solve it. Inflation will only abate when the pandemic ends, central banks roll back easy money policies, the private sector increases production, the supply chain stabilizes, and, yes, governments finally undertake more responsible levels of spending.”
“Over the course of the pandemic, the Treasury Department issued roughly $6 trillion, $2.7 trillion of which was monetized by the Federal Reserve. Americans were sent $5.1 trillion through various programs, including individual checks and unemployment bonuses. Overall federal debt has since risen by about $6 trillion.
This response assumes the 2020 recession was sparked by a demand shock leading to a fall in aggregate demand, rather than the strangling of aggregate supply caused by the pandemic and lockdowns. Under these circumstances, sending people and companies money was never likely to impact output. Instead, it greatly inflated demand for the durable goods still being produced.
Even by the Keynesian economic standards that prompt this sort of fiscal response, COVID-19 relief was larger than any “output gap”—the difference between what the economy is producing and the most it could produce. In March 2020, the gap was $2.3 trillion, and that year alone, the government spent $3 trillion through several relief bills.
In March 2021, Democrats passed the over-the-top $1.9 trillion American Rescue Plan. At the time, the projected output gap was $700 billion through 2023—the period when most of the spending would take place. As such, the bill was two or three times too big, especially considering the economy was mostly reopened and growing, with unemployment dropping fast from 14.8 percent the year before to 6 percent.”
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“Today, several new studies confirm that this bout of inflation is rooted in demand, not supply. That’s not to say supply-chain chokepoints, originally resulting from the global shutdown imposed by governments and a sudden shift away from services toward goods, played no role.
However, we wouldn’t have such large-scale supply-chain problems without the shutdowns followed by the aforementioned government-fueled increase in demand for durable goods. According to Robert Koopman at the World Trade Organization, artificially inflated demand accounted for as much as two-thirds of supply shortages.
Second, global supply chains are, obviously, global. If inflation were truly the product of supply-chain issues, we would witness roughly the same rates of inflation throughout the industrialized world. But we don’t. Most industrialized countries have lower levels of inflation than the United States. These other countries also implemented significantly lower amounts of COVID-19 spending.”
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“Today, all prices are rising, including wages (though for now at a lower rate), and the inflation is persistent. This is because of overblown fiscal and monetary policies. Tackling the problem requires strong Fed actions and significant fiscal restraint by Congress. Short of both, inflation will persist for much longer, inflicting disproportionate harm on the most economically vulnerable.
This also means that the recent calls to offset inflation with subsidies for gas, housing, child care, and more will require borrowed money. Since fiscal largesse is the source of the problem, and since these efforts make the affected markets more inefficient, the approach raises the risk of a great stagnation spiral.”
“Inflation is at a 40-year high in the United States and accelerating around the globe. The situation may very well get worse before it gets better, as Russia’s war on Ukraine stands to exacerbate price pressures, as does a new round of lockdowns in China due to Covid-19.
Among economists and experts, there’s no strict consensus about what exactly is to blame. There are certain factors widely agreed upon that we’ve been hearing about for months: supply chain woes, rising oil prices, shifting consumer demands. These concerns have hardly subsided. But there are other arenas where there’s more disagreement, such as the role government stimulus has played in increasing prices, and the possibility that corporate greed is an important factor.
There’s also no clear agreement on what the solution is. The Federal Reserve is starting to make moves to try to tamp down inflation, but it’s going to take time for that to have an impact. It’s still uncertain how aggressive the Fed will be or what risks those fixes could pose for the broader economy. The White House is trying to combat price increases, but there’s not really a ton it can do.
“They’re actually doing the right thing, they just don’t have many tools,” said Jason Furman, a Harvard economist and former adviser to President Barack Obama. He said one thing they can do and are doing is to be “realistic in leveling with people” that of course they don’t like inflation, and this isn’t a problem that will solve itself overnight.
While a lot is unknown, one thing seems pretty clear to most: Much of this is the result of factors that have been brewing for quite some time; some back to the start of the pandemic, many even longer. As for when it will be over, we’re likely to be in this situation for a while.”
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“As much as many people say that they feel bad about the economy right now, the economy is actually pretty decent. Unemployment is relatively low, many people still have quite a bit of money to spend, and the recovery, in a lot of ways, looks pretty solid. But again, therein lies part of the problem: People have money to spend, but not so many places to spend it. “There are multiple things that are happening all at once right now. The pandemic is still going on, we still have supply chain bottlenecks around the globe, parts of the economy are getting up to speed,” Amarnath said.”
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“Expectations play a role here — when everybody thinks inflation is happening, then businesses start charging more and workers start charging more money to compensate, which makes the whole thing worse.
“Once you have inflation, there’s some self-perpetuation of it,” Furman said. “There’s some passthrough of wages to prices, and some passthrough of prices to wages. Inflation expectations matter.””
“Partisans in the inflation battle frequently fail to acknowledge that their stories are not mutually exclusive. If public policy boosts demand while production bottlenecks hamper supply, there is no question about what happens to prices—up they go. Digging further into the debate provides additional reasons to eschew confident assertions.
Orthodox economic theory says fiscal and monetary stimulus can increase total spending, or what economists call aggregate demand. We’ve certainly had lots of both. The American Rescue Plan Act, signed into law by President Joe Biden on March 11, 2021, had a top-line figure of $1.9 trillion. Expansionary fiscal policy, meaning increased government spending to boost output and employment, requires deficit spending, because financing outlays with taxes blunts the effects on aggregate demand.
At the same time, the Fed’s balance sheet has surged. Total assets held by the central bank grew from roughly $4 trillion in early 2020 to $8.9 trillion as of late January. Driven by these asset purchases, the M2 money supply—cash, checking accounts, and “near monies,” such as savings accounts and money market mutual funds—grew from $15.5 trillion in early 2020 to more than $21.6 trillion today. So Americans definitely have more money to spend.
It is also true that fiscal and monetary expansion don’t boost supply of the goods people might want to buy with that money. Widespread COVID-prevention policies threw a wrench into the economy’s gears. Transportation gridlocks on sea, on land, and in the air make production and distribution harder. Major inputs, such as semiconductors, are frustratingly scarce. There are also frictions in labor markets, such as recently boosted unemployment benefits and union disputes over vaccine mandates. The combined effect is rising prices, independent from demand considerations.
A supply-and-demand double whammy could explain inflation. But both stories have problems.
On the demand side, all that stimulus might not be as expansionary as it appears. “We know from experience that budget deficits, by themselves, are not very inflationary,” writes Scott Sumner, the doyen of the market monetarist school, in his new book The Money Illusion (University of Chicago Press). Sumner cites the absence of major inflation during the Reagan and Obama administrations, both of which presided over growing budget deficits.
Nor was money especially loose during the early stages of the pandemic. As the money supply ballooned, the velocity of money—its average rate of turnover—cratered. People held on to that extra money. According to data from the Federal Reserve Bank of St. Louis, money demand increased by 22.5 percent from the fourth quarter of 2019 to the first quarter of 2020. Velocity remained depressed as the money supply continued growing. Since supply outpaced demand, monetary conditions did loosen. But Fed policy did not open the liquidity floodgates, as many initially supposed.
As for the supply of goods, congested production and slowed distribution clearly are making inflation worse. But this explanation is prone to just-so stories. Supply conditions vary greatly by sector. Aggregate data, constructed to get a fuller picture, is not as clean on the supply side as on the demand side.
We also have to consider politics. Behind the inflexible insistence that supply problems matter most lies a possibly partisan reluctance to indict policy makers and technocrats.
The doves are down, but they are not out for the count. Market inflation expectations peaked in mid-November. As of January, bond traders forecast 2.8 percent per year for the next five years, meaning they are not convinced runaway inflation is our destiny. “Predictions are hard, especially about the future,” a wise man once said. Much will depend on how fast supply constraints loosen and Fed policy tightens.”
“At the time I wrote my July 2021 piece, “Don’t worry about inflation,” a prescient copy editor noted that this headline might look bad if I was wrong and inflation got increasingly worse. I responded that I stood by it, and if I was wrong, I would write a groveling follow-up piece.
So here we are.”
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“I unfairly dismissed the most boring, Econ 101 explanation for why inflation happens: that there was too much money sloshing around for the amount of stuff the economy was able to produce — meaning the price of that stuff went up.”
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“Past stimulus checks during non-pandemic episodes have been disproportionately spent on durable goods, rather than services, suggesting that the stimulus checks might have accelerated this phenomenon just as the virus did. And because prices of goods tend to be less “sticky” than prices of services (meaning they tend to rise and fall more easily), this especially contributed to inflation.
This surge in spending led to big, well-publicized shortages in certain areas, most famously cars, as demand for durable goods outstripped the economy’s ability to produce them (sick workers limiting production was a factor, too, if a smaller one). That provoked localized price spikes on a few goods. And because oil producers slowed production in expectation of a big post-Covid recession, they too struggled to keep up with demand, so gas prices rose — which Putin’s invasion of Ukraine only worsened.
For a while, many commentators thought you could wave off inflation fears by saying it was just limited in a few sectors. But at this point, an “inflation in a few places” theory doesn’t really fly.
Some goods, like oil and cars, have specific narratives like a chip shortage or low drilling that could explain inflation. But as Bloomberg’s John Authers has detailed, inflation is still rising even if you exclude those goods. The Dallas Fed’s “trimmed mean” inflation measure, which purposely removes “outliers” where prices are rising extremely fast or extremely slow from the data, started to shoot up recently, too.”
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“Due to a combination of rapidly growing wages through all of 2021, plus trillions in government fiscal support, there has just been too much money around combined with insufficient goods and services to spend it on.
That’s led to not just inflation but accelerating inflation, as wage increases contribute to price increases and higher expectations of future inflation contribute to higher immediate inflation. That’s why you’ve started to see inflation in categories beyond just gas and cars. It’s a situation similar to what NAIRU would predict, except I would argue it’s not really about low unemployment.”
“As the greatest inflation spike of the last 50 years occurs, the utter failure of economists, their models, and many pundits to foresee what was coming is worth highlighting. Of course, the biggest malfunction in the story was that of the Federal Reserve itself, which had a clear mandate to keep prices stable and seems surprised by their lack of stability.
It’s no understatement to say that the Fed failed to properly anticipate the inflation surge. On Feb. 8, 2021, Raphael Bostic, the president of the Atlanta branch of the Fed, said, “I’m really not expecting us to see a spike in inflation that is very robust in the next 12 months or so.” A few days later, Boston Fed President Eric Rosengren echoed this sentiment, noting that he would be “surprised” to see broad-based inflation sustained at a level of two percent before the end of 2022.
As the saying goes, problems often start at the top. When testifying before the House Financial Services Committee in February 2021, Fed Chair Jerome Powell predicted that it might take more than three years to hit the two percent inflation goal.
Around the summer of 2021, inflation became hard to ignore. Yet Fed officials insisted that it wasn’t yet time to roll back their temporary policies because they weren’t responsible for the rise in prices. The main villain was identified as supply-chain restraints. Once resolved, we were told, inflation would prove to be transitory. Testifying in June of last year before a House subcommittee, Powell said:
“If you look…at the categories where these prices are really going up, you’ll see that it tends to be areas that are directly affected by the reopening. That’s something that we’ll go through over a period…then be over. And it should not leave much of a mark on the ongoing inflation process.”
During a speech in Jackson Hole, Wyoming, last August, Powell again echoed this sentiment. He also noted that “longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory.”
But as Hoover Institution economist John Cochrane has been reminding us all along, long-term inflation expectations are notoriously poor predictors of inflation. Sadly, few listened, and team “transitory” was born.”
“On recent earnings calls, massive corporations have posted huge profits and promised continued price increases, even as inflation continues to rise to rates not seen in decades.
For example, Starbucks celebrated a 31 percent increase in profits at the end of 2021 — but it still plans to hike prices this year, the New York Times reported earlier this month. Tyson Foods, the meat processing behemoth, raised its prices 19.6 percent overall, driving record stock prices for the company.
Inflation, meanwhile, hit a four-decade high in January, with the consumer price index increasing 7.5 percent over the past year, before seasonal adjustment. Although prices dropped in the energy sector for goods like gasoline and fuel oil, every other sector — including medical care, apparel, transportation, food, and shelter — saw increases, resulting in the largest overall 12-month increase since 1982.
Some of that’s to be expected: With Covid-19 still throwing kinks into the global supply chain, the challenge of getting goods and materials where they need to be translates into increased prices for both companies and consumers. Meanwhile, consumers have increased purchasing power due to wage increases and stimulus benefits like checks, child tax credits, and low interest rates — and at least in the US, they’ve proven willing to pay higher prices. At its core, those are the necessary ingredients for inflation — demand outstripping supply.
But some economists and politicians say that corporations are using inflation as an excuse to jack up prices beyond what’s necessary to account for their increased costs. More than just passing those costs onto consumers, they say, corporations are taking advantage of the unprecedented global economic circumstances to increase their profits, simply because they can.”
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“there’s plenty of pushback, both political and economic, to this perspective. A survey of a number of leading economists by the Initiative on Global Markets at the University of Chicago’s Booth School of Business showed that a majority of those surveyed — 67 percent — disagreed or strongly disagreed with the statement, “A significant factor behind today’s higher US inflation is dominant corporations in uncompetitive markets taking advantage of their market power to raise prices in order to increase their profit margins.” Only 7 percent of those surveyed agreed or strongly agreed with the statement.”
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“But critics of major corporate price increases aren’t arguing that the consolidation is the only force driving inflation; rather, that because these conglomerates hold so much of the market share, they are able to raise prices out of step with the actual price increases they’re incurring and passing on to consumers — essentially, that they’re using the current inflationary environment as an excuse to raise prices more than necessary because they don’t have competitors to drive them to keep prices down, in turn contributing to the problem of inflation.”