The rate of inflation is at its highest level since Ronald Reagan’s presidency in 1982. Usually, the cause is growth in money (currency in circulation plus demand deposits) chasing too few goods.
However, inflation also can be caused by a shortage of goods and services, which is what is happening now. To solve inflation, let’s solve first things first.
The U.S. Bureau of Labor Statistics reported Friday that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8% in November. While this might seem small to the casual observer, that means the index increased 6.8% over the past 12 months and that the same index, less food and energy, rose 4.9%.
This is where we get into political opinions.
The Republican position is that it’s because of monetary policy caused by the influx of money into the economy through federal COVID-19 relief and that we should spend no more until inflation subsides.
The Democratic Party position is that COVID-19 relief saved the economy, and the passage of the Build Back Better bill will not only curb inflation but will reduce prices for things like child care and prescription drugs.
If only there was a litmus test telling us what positively caused the inflation, we could take corrective action. There’s evidence supporting both positions.
Mitchell Hartman, writing for Marketplace.org, said, “All kinds of stuff are stuck in production or in transit all over the place. That’s causing shortages, which, in turn, are stoking inflation.”
In September, Federal Reserve Chairman Jay Powell told a House committee that the central bank thinks the recent surge in prices is “a function of supply-side bottlenecks over which we have no control,” but also that “high inflation will abate because ... the factors that are causing it are temporary and tied to the pandemic and the reopening of the economy.”
But it is obviously taking longer to clear up than many experts, including Powell, predict.
As one theory goes, as the pandemic wore on, many consumers became flush with cash, since they continued to earn the same while reducing expenses because of the work-from-home trend. And that doesn’t even count the bonus cash consumers received from the government.
So, since we couldn’t spend on services (eating out, movies, other events) because of the pandemic, we began buying more goods. Goods that have increasingly been manufactured overseas.
The Harvard Business Review points out that “the United States and other advanced industrial economies have evolved a highly efficient and productive product manufacturing-and-delivery system that provides them with a cornucopia of products at relatively low costs. But inherent in that system are dependencies and expectations that the pandemic has called into question.”
Amen. Like the global supply chains hitting logjams, causing prices to spike as buyers competed for limited supplies, as Hartman pointed out.
So, how long might it take for the supply chain to get ironed out and meet business and consumer demand, taking upward pressure off prices?
Many predict it’ll be well into next year.
“If the pandemic is still raging, causing people to be sick and not go in to work and shutting down factories and Chinese ports, when the pandemic goes away, these problems will go away,” Mark Zandi, at Moody’s Analytics, said.
So, why not just wait?
Demand for goods is up and waiting won’t solve that problem. We need infrastructure to transport goods to the point of need.
We need practical solutions, like more flexibility in grants, to improve our ports; more money for the Port of Savannah, to move containers inland and free up valuable dock space; more grant funding for new programs, to modernize ports and marine highways; and funding to deepen harbors for larger cargo ships.
Therefore, it matters that we understand the cause of inflation, so we may correct it. Otherwise, we might believe it is only too much money chasing too few goods.
So, first thing’s, first. Fix the supply chain problem and take the pressure off prices.