The Fuels of Rapid Inflation Debate over what’s to blame: Pandemic or policy

Rising prices that have caused headaches for consumers, businesses and policymakers around the world have sparked a heated debate in Washington about the extent to which rapid inflation is now the result of economic choices. policy choices in the United States and the extent to which they stem from global factors tied to the pandemic, such as supply chain entanglements. .

At a time when rapidly rising prices are weighing on consumer confidence and creating political liability for President Biden, White House officials have repeatedly blamed international forces for the fall. High inflation, including factory closures in Asia and overtaxed shipping routes, is causing shortages and pushing up prices everywhere. Officials increasingly cite high inflation in places including the euro area, where prices are climbing fastest speed recordedas a sign that the world is going through a general moment of price pain, taking the blame off US policy.

But a group of economists point to government policies as a large part of the cause of US inflation at a 40-year high. While they agree that prices are rising due to shutdowns and supply chain troubles, they say the US decision to flood the economy with stimulus money has helped push up consumer spending. excessively, exacerbating those global trends.

The world’s commerce machine is producing, shipping, and delivering more goods to American consumers than ever before, as people splurge on couches, cars, and home office equipment, but chains Supply could not keep up with that increased demand.

Kristin J. Forbes, an economist at the Massachusetts Institute of Technology, says that “at least half of the increase is due to global factors.” But “there is also a domestic demand component that is important,” she said.

The White House has tried to tackle inflation by boosting supply – announcing measures to open up ports and trying to ramp up domestic production, all of which take time. But rising inflation has hampered Mr Biden’s ability to pass social policy and climate bills due to concerns that more spending could fuel inflation. Senator Joe Manchin III, a West Virginia Democrat who has the key vote to pass the legislation, cited rising prices as one reason he did not support the bill.

The demand side of today’s price hike could make it easier for policymakers to deal with. The Federal Reserve is preparing to raise interest rates to make borrowing more expensive, slowing spending, in a formula that could help curb inflation. Government assistance to households can also naturally reduce demand and relieve price pressures.

Inflation has accelerated in the United States, with the Consumer Price Index rising up 7% in the year to Decemberthe fastest rate since 1982. But in recent months, it has also increased sharply in many countries, a real management official has emphasized.

“Inflation is related to the supply chain,” President Biden said at a news conference on Wednesday. “While it varies from country to country, it is a global phenomenon and is driven by these global issues,” said Jen Psaki, the White House press secretary, after The latest inflation data has been released.

Such is the case that supply disruptions are leading to higher inflation in many places, including in major developing economies such as India and Brazil and in advanced economies such as eurozone. Data released in UK and in Canada on Wednesday showed prices rising at their fastest pace in 30 years in both countries. Inflation in the euro area, measured differently than the US calculates it, has climbed to an annual rate of 5 percent in December, according to initial estimates by the European Union statistical office.

“The US is unlikely to be an island in the midst of a storm of supply disruptions and rising demand, especially,” said Eswar Prasad, a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution. goods and goods.

But some economists point out that even as inflation spreads globally, it’s still more pronounced in the US than elsewhere.

“The United States already has much higher inflation than most of the other advanced economies in the world,” said Jason Furman, an economist at Harvard University and a former economic adviser to the Obama administration. conclude that U.S. price growth consistently faster.

The difference, he said, comes because “the US stimulus is in a category of its own”.

White House officials have argued that the difference in “core” inflation – which does not include food and fuel – has been minuscule between the United States and other major economies over the past six months. And all those gaps disappear if you take out the price of autos, which are rising sharply and having a larger impact in the United States, where consumers buy more cars. (Mr. Furman argues that people who don’t buy cars are spending their money on something else, and that it’s unfair to remove them from America’s consumer basket.)

Administration officials also noted that the United States has seen a strong recovery in economic growth. In October, the International Monetary Fund said it expected US output to grow 6% in 2021 and 5.2% in 2022, compared with last year’s 5% growth in the euro area. euro and 4.3% growth is expected for this year.

“To the extent that we get more heat, we’re going to have a lot more growth for it,” said Jared Bernstein, a member of the White House Council of Economic Advisers.

While many countries have spent heavily to insulate their economies from the coronavirus outbreak – enough in some places to spur demand and potentially inflation – the United States has approved of the deal. 5 trillion dollars in spending in 2020 and 2021. That outstrips the response in other major economies in terms of their share of national output, according to the report. data compiled by the International Monetary Fund.

Many economists support protecting workers and businesses early from the pandemic, but some are concerned with the size of the $1.9 trillion package last March under the Biden administration. They argue that sending households another round of stimulus, including a check for $1,400, further boosted demand as the economy recovers.

Consumer spending seems to respond: Retail salesfor example, spiked after the check was shipped.

Adam Posen, president of the Peterson Institute for International Economics, said the US government spent too much in too short a time in the first half of 2021.

“If it weren’t for the congestion and shortage of the labor market, it might not have mattered so much. But it did,” he said.

Americans found themselves with a lot of money in the bank, and as they spent that money on goods, demand collided with a global supply chain that was too fragile to keep up.

Virus outbreaks have shuttered factories, and ports facing backlogs of cargo and shortages of trucks on shipping lanes. Americans are still manage to buy more goods than ever in 2021 and foreign factories sent a record total number of products to the stores and doorsteps of the United States. But all that shopping is not enough to satisfy consumer needs.

The Port of Los Angeles is a window into nonconformity. The port had its busiest calendar year on record last year, handling 16% more containers than 2020. Even so, the port still has a large number of ships waiting to dock, some of them, as of now. Friday, had to wait a month or more.

The extra help the government provided to families last year weighed on inflation because of those bottlenecks, economists say. Giving households more money to buy new camping equipment or kitchen countertops has widened the gap between what consumers want and what companies can actually offer.

As goods fell short and started to cost more to ship, businesses raised prices.

Government checks are not alone in driving strong US demand. As virus fears prevent consumers from planning a trip to Paris or a dinner at a fancy restaurant, many have turned to refurbishing living rooms, making merchandise unusually hot. . Lockdowns force families to suddenly stop spending at the start of the pandemic helped to swell the reserves of savings.

And Federal Reserve interest rates are bottoming out, which has boosted demand for big purchases made with credit, from homes and cars to business investments like machinery. and computer. The family has take on more house and car debtdata from the Federal Reserve Bank of New York shows, helping to boost those sectors.

But if stimulus-driven demand is driving inflation, the diagnosis could come with a silver lining. It may be easier to rein in consumer spending than quickly reorienting tangled supply lines.

People may start to buy less as government help dwindles. Spending could shift away from goods and into services if the pandemic eases. And Fed policies operate on demand – not supply. The Fuels of Rapid Inflation Debate over what’s to blame: Pandemic or policy

Fry Electronics Team

Fry is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – The content will be deleted within 24 hours.

Related Articles

Back to top button