The price of consumer goods rose 6.8% over the past year, the Bureau of Labor Statistics reported on Friday, the largest increase since the 1980s. “Basically across the board,” as the report said. write Vox’s Rani Molla and Emily Stewart, daily shopping, from food to gasoline, costs more, and it will be an expensive vacation time.
This part is not up for debate. What is, however, is how worried everyone should be. In Washington, there is a deep disagreement over what exactly is responsible for the spike in inflation and what the government can – or should – do about it.
Some of the causes are pretty obvious: Entering the third year of the Covid-19 pandemic, the United States – and much of the rest of the world – is grappling with a supply chain crisis. This means that most products, from game consoles to oranges, are harder to get off store shelves for one reason or another, whether it’s a lack of critical tech components or a lack of critical technology. backup in ports due to a labor shortage. American consumers, however, simply haven’t stopped buying, and this disjunction between supply and demand has caused record inflation.
Some economists, along with President Joe Biden, believe the pandemic – and the supply chain linked to the pandemic – are the main culprits, and inflation will subside as the United States continues to fight the pandemic and implement supply chain fixes. Friday, according to CNN’s Kaitlan Collins, Biden told reporters that “the reason for inflation is that we have a really serious supply chain problem.
Others, however, fear the problem is more serious than that. Former Treasury Secretary Larry Summers, for example, also pointed out that government spending was a reason for the rise in inflation, and thinks it’s far from a hindrance.
Biden administration projects optimism on inflation
The bullish case of current inflation looks like this: Although supply chain problems have resulted in a shortage of many consumer goods, Americans haven’t stopped buying – and with more money in their pockets. pockets, they have the ability to do so.
Specifically, blockages and being stuck at home – unable to travel or go to restaurants, bars, and live events – have changed what Americans spend their money on. Less money spent on travel or experiences, combined with stimulus funds, has led many Americans to buy more consumer goods. This, combined with the supply chain issues that have been around for decades, has led to the current and precipitous rise in inflation.
As vaccines make it more possible for a return to normal life, America’s spending habits should start to return to normal, which could also impact inflation. Biden painted a relatively optimistic picture on Friday, tell reporters he thinks inflation is at its peak.
“I think you’ll see it change sooner, faster, faster than people think,” Biden said. “All other aspects of the economy are accelerating.”
President Biden answers a question from @kaitlancollins if we are looking for the peak of inflation:
“I think you’ll see it change sooner, faster, faster than people think. All other aspects of the economy are moving forward. pic.twitter.com/nIZEcOmlRX
– Joey Garrison (@joeygarrison) December 10, 2021
Soaring inflation doesn’t mean bad economic news across the board. As Claudia Sahm, former Federal Reserve economist and senior researcher at the Jain Family Institute, told Vox in November:
Both because the jobs have returned and also because the federal government has given a lot of economic aid, people – especially those at the top of the pile – have, on average, enough money to pay these. additional prices in the majority of cases.
Yet while inflation numbers are not the only measure of economic health, the reality is that inflation is high after decades of hovering around 2%. As Sahm said, this is a ‘sore point’ as the economy recovers from the Covid-19 pandemic, and it is a point that people are noticing because they interact every day at the gas pump and grocery store. But while the current numbers are above the Fed’s targets, they are nowhere near the level seen during so-called Great Inflation, when consumer prices climbed more than 14%.
Some fear Biden isn’t doing enough to fight inflation
Nonetheless, some influential voices, including Summers, sounded the alarm bells on long-term inflation problems and stressed that public spending was the engine of inflationary problems.
In a Washington Post editorial in February, Summers wrote that “there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will trigger inflationary pressures of. a type we haven’t seen in a generation, with ramifications for the dollar and financial stability.
In the same article, Summers accused the administration of denying “even the possibility of inflation”, raising concerns that Biden was not sufficiently prepared for the price hike that coincided with stimulus packages from large-scale and did not put the appropriate measures in place. act quickly to bring inflation down.
This worry – that the administration will not act quickly and that inflation will become a longer-term problem, rather than the transitory problem Biden predicted – is playing out, at least somewhat. For now, as the November figures show, inflation is not slowing down.
While the United States has spent billions of dollars alleviating the pandemic, however, inflation is also occurring elsewhere in the world, where governments have taken different approaches to dealing with the fallout from the pandemic – suggesting that government spending doesn’t tell the whole story.
What is the government doing to contain inflation? What can it do?
While the Biden administration is doing what it can to fix supply chain problems and lower gas prices, most of the tools to fight inflation are in the hands of the Federal Reserve.
” I do not think so [inflation] is going to change a lot anytime soon, ”Jason Furman, former chairman of the White House Council of Economic Advisers, told MSNBC on Friday. “I don’t think the White House can do much about this, but for the Federal Reserve, a better economy and higher inflation both tell them they have to keep pivoting to get it under control.”
One of the ways the Fed plans to cool the economy is to “step down” the $ 120 billion it spends per month on government guaranteed bonds, which has pumped money into financial markets. during the pandemic. In November, Fed Chairman Jerome Powell announced that the central bank would reduce that amount by $ 15 billion each month. The buying program is supposed to end in mid-2022, but as the New York Times reported in early December, this program could end faster as the Fed tries to reduce inflation.
“At this point the economy is very strong and inflationary pressures are high,” Powell said in late November. “So it’s appropriate, in my opinion, to consider completing the reduction in our asset purchases, which we actually announced at our November meeting, perhaps a few months earlier.”
It could also be accompanied by interest rate hikes, although the Fed has not announced specific plans to do so. Interest rate hikes are a powerful tool in the Fed’s arsenal to slow consumer spending, and hence inflation. And, as inflation continues to rise, this seems to be a more likely tactic for Powell, once the Fed is convinced the economy has reached “maximum employment” – a signal that the economy is on enough. healthy to resist the withdrawal of government support.
Summers, however, sounded the alarm at Bloomberg on Friday, saying the Fed should also raise interest rates – the amount a lender charges a borrower for a loan or credit – repeatedly over the next year. to help control inflation.
“We triggered, for the first time in 40 years, excessive inflation caused by the overheating of the economy,” he said, warning that the government had raised inflation “well above 2 % – maybe in the 4% or even higher range ”, and that could be permanent.
Beyond monetary policy, however, the other massive piece of the puzzle is the supply chain – and it’s something over which politicians and policymakers have much less control. Biden tried to alleviate supply chain problems by running the Port of Los Angeles around the clock, cleaning the docks so that goods did not wait for days on cargo ships stranded in the water. And the release of 50 million barrels of oil from the United States Strategic Petroleum Reserve last month was aimed at lowering gas prices, which have already started to fall.
Most likely, however, the supply chain will remain boomed for the foreseeable future – keeping inflation higher than we’re used to – and policymakers will need to react to that reality.