“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.”
“many economists say that the foundering supply chain has played a heavy hand in driving up prices”
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“it’s become clear to many economists that American inflation isn’t just a supply chain issue: Our economic response — namely, the trillions of dollars of COVID-19 stimulus paid out over the last 24 months — appears to be a meaningful differentiator.
A good way to tease this out is to look at Europe, which has faced similar supply chain issues and an even worse oil shock, as it is more dependent on foreign oil than the U.S. And yet, European countries have experienced lower inflation, perhaps due in part to their smaller government response.”
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““If you look compared to Europe, in the United States goods consumption is higher, and services consumption is higher than what it is [in Europe].”
One reason for that higher consumption is government spending. In 2020, a divided Congress under former President Donald Trump passed two separate pieces of legislation — first the $2 trillion CARES Act in March, which doled out $1,200 checks to most single adults and even more to families, then a $900 billion package in December that, among other aid, issued $600 targeted checks. But then in March 2021, Democrats passed another round of government stimulus in a $1.9 trillion relief package — including $1,400 direct payments to individual Americans — which some experts warned at the time might cause inflation.”
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“Furman stressed to me that inflation likely would have been high even without a COVID-19 relief bill, however, because of a reopening economy and base effect distortions. Moreover, rising gas prices — one of the most tangible ways in which Americans process inflation — likely have nothing to do with the American Rescue Plan and much more to do with the dynamics of global oil. There is at least some evidence, though, that government spending has caused inflation, beyond the explanation that it’s merely been a supply chain issue.”
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“not all government spending has the same effect on inflation. In fact, historically government spending hasn’t usually led to inflation. A 2015 paper in the European Economic Review found, for example, that the effect of government spending on inflation post-World War II was “not statistically different from zero.” But Bill Dupor, a co-author of that study and vice president of research at the Federal Reserve Bank of St. Louis, told me that the size of the intervention matters — and that could help explain why government spending today has spurred inflation but hadn’t in recent memory.”
“With American consumers spending freely and many supply chains still snarled, year-over-year inflation may have notched yet another four-decade high in January.
The factors that have accelerated prices since last spring remain largely in place: Wages are rising at the fastest pace in at least 20 years. Ports and warehouses are overwhelmed, with hundreds of workers at the ports of Los Angeles and Long Beach, the nation’s busiest, out sick last month. Many products and parts remain in short supply as a result.
And reports indicate that the expiration of stimulus checks and other government aid has yet to slow Americans’ appetite for shopping.”
“Many of the meat-industry problems the Biden administration identifies as in need of fixing are very real. For example, the administration says meat prices are through the roof. That’s true. The administration says the meatpacking industry is highly consolidated, with just four giant companies responsible for slaughtering and processing nearly 7 out of every 8 pounds of beef (and slightly lower amounts of pork and poultry) we eat every year. That’s true, too. (It was also largely true 20 years ago and 100 years ago.) The Biden administration has also argued large meatpackers have been busy “raising prices, underpaying farmers—and tripling their profit margins during the pandemic.” Also true.
The Biden administration believes meat prices are sky high due largely to this industry consolidation and lack of competition.”
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“the real obstacle that’s preventing ranchers and farmers that utilize these facilities from supplying more meat to more Americans is an outdated federal law that props up the large processors while preventing local meat producers from selling steaks, roasts, and other cuts of meat to consumers in grocery stores, at farmers’ markets, and elsewhere in their communities.”
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“farmers and ranchers who want to sell their meat commercially (or for it to be re-sold) in this country must have their livestock slaughtered in USDA-inspected (or state equivalent) slaughter facilities, where an inspector must be present and inspect every animal that’s slaughtered. In order to be sold commercially, meat from those same animals also must be processed (cut into steaks, ground up, cured, etc.) in a USDA-inspected processing facility. There’s a shortage of slaughter and processing facilities available to most small farmers and ranchers, and many plants are owned by a handful of large companies that don’t cater to those farmers and ranchers. As all this suggests, the current system poses a giant hurdle to many small farmers and ranchers.”
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“As a fix, the Biden administration proposes, under a wordy header announced this week—the Biden-Harris Administration’s Action Plan for a Fairer, More Competitive, and More Resilient Meat and Poultry Supply Chain—to give $1 billion to smaller meat processors so that they can ramp up their production efforts, which would in theory provide farmers and ranchers with more choices for slaughter and processing. The plan also includes other elements, including “launching a new portal to allow farmers and ranchers to report unfair trade practices by meatpackers.””
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“The USDA has been aware of many of the aforementioned problems with its meat-inspection scheme for decades. As I explain in my book, Biting the Hands that Feed Us: How Fewer, Smarter Laws Would Make Our Food System More Sustainable, when the agency commissioned a study 10 years ago to look at ways to streamline these regulations, the authors of the study concluded “that no one with the USDA or . . . working as professionals within the meat industry believe[s] that streamlining regulations will ever occur.”
Righteous pessimism hasn’t stopped people who care about small farmers and the livestock they raise from trying to come up with various fixes. The PRIME Act, a tremendous bill that has repeatedly failed to pass Congress, would, I explained in a piece in the The Hill in 2018, “provide states with the option to regulate livestock slaughter and sale within their borders.” Local solutions exist, too, but the federal government largely ignores or seeks to undermine them. States such as Wyoming and Colorado that have sought to use federal law to foster more local competition have bumped up against threats from overzealous USDA bureaucrats.”
“consider the public debt—especially the federal debt, which ballooned as a result of large budget deficits in recent years. (In 2020, the federal government raised $3.4 trillion in revenue and spent $6.6 trillion.) The interest cost of the national debt was $253 billion in 2008, equivalent to $325 billion in 2021 dollars; it remained around that level through 2015. Even though the debt doubled in those years, sharply falling interest rates and low inflation helped contain costs.
But that was yesterday. With today’s higher inflation and rising interest rates (perhaps with more to come), the Congressional Budget Office (CBO) estimates that the interest cost of public debt is $413 billion in 2021, stated in current dollars. Obviously, any dollar spent on interest cannot be spent on government benefits or services.
Looking ahead, the CBO expects more of the same. For 2026, it projects that the interest rate on 10-year Treasury bonds, currently 1.5 percent, will be 2.6 percent, and that the interest cost of the federal debt will rise to $524 billion. For 2030, the projections are 2.8 percent and $829 billion, respectively, all stated in current dollars for the noted years.
Now we are talking about real money. To put $829 billion into perspective, in 2020 the United States spent $714 billion on the military, $769 billion on Medicare, and $914 billion on all nondefense discretionary spending, all stated in 2020 dollars. Back-of-the-envelope calculations strongly suggest that some spending categories will have to give.”