The price increases bedeviling consumers, businesses and policymakers worldwide have prompted a heated debate in Washington about how much of today’s rapid inflation is a result of policy choices in the United States and how much stems from global factors tied to the pandemic, like snarled supply chains.
In a time when price increases are still too rapid to benefit consumers and create a political liability for President Biden’s office, White House officials repeatedly blame international forces for high inflation. These include factory closures in Asia and overtaxed shipping routes, which are creating shortages and driving up prices all around. Officials are increasingly pointing to high inflation in the euro area, which is seeing prices rise at an unprecedented rate, as a sign of the world’s price pain. This deflects blame from the U.S.
A chorus of economists points out that U.S. inflation is at an all-time high of 40 years. While they agree that prices are rising as a result of shutdowns and supply chain woes, they say that America’s decision to flood the economy with stimulus money helped to send consumer spending into overdrive, exacerbating those global trends.
The world’s trade machine is producing, shipping and delivering more goods to American consumers than it ever has, as people flush with cash buy couches, cars and home office equipment, but supply chains just haven’t been able to keep up with that supercharged demand.
Kristin J. Forbes, an economist at the Massachusetts Institute for Technology, said that “more than half of the increase, at least, is due to global factors.” But “there is also a domestic demand component that is important,” she said.
The White House has tried to address inflation by boosting supply — announcing measures to unclog ports and trying to ramp up domestic manufacturing, all of which take time. But rising inflation has already imperiled Mr. Biden’s ability to pass a sprawling social policy and climate bill over fears that more spending could add to inflation. Senator Joe Manchin III, the West Virginia Democrat whose vote is critical to getting the legislation passed, has cited rising prices as one reason he won’t support the bill.
The demand side of today’s price increases may prove easier for policymakers to address. In an attempt to control inflation, the Federal Reserve will raise interest rates. This will make borrowing more costly and slow down spending. The government providing assistance to households could also help to reduce demand and ease price pressures.
Understand Inflation in America
The US has seen inflation accelerate sharply, with the Consumer Price Index rising by 7 percent in the past year to December, the fastest pace since 1982. However, it has risen sharply in many other countries over the past months, as administration officials have stressed.
“The inflation has everything to do with the supply chain,” President Biden said during a news conference on Wednesday. “While there are differences country by country, this is a global phenomenon and driven by these global issues,” Jen Psaki, the White House press secretary, said after the latest inflation data were released.
Supply disruptions lead to higher inflation across many places, including large developing countries like India and Brazil as well as developed economies like the euro zone. On Wednesday, data from Canada and the United Kingdom showed that prices were increasing at an unprecedented rate for 30 years in both countries. According to the initial estimate of the European Union statistics office, inflation in the eurozone, which is calculated differently from the U.S., rose to a rate of 5 percent annually in December.
“The U.S. is hardly an island amidst this storm of supply disruptions and rising demand, especially for goods and commodities,” said Eswar Prasad, a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution.
However, economists point out that while inflation is pervasive all over the globe, it has been more prominent in America than anywhere else.
“The United States has had much more inflation than almost any other advanced economy in the world,” said Jason Furman, an economist at Harvard University and former Obama administration economic adviser, who used comparable methodologies to look across areas and concluded that U.S. price increases have been consistently faster.
The difference, he said, comes because “the United States’ stimulus is in a category of its own.”
White House officials have argued that differences in “core” inflation — which excludes food and fuel — have been small between the United States and other major economies over the past six months. The gaps are almost gone if you take out car prices. These have been rising rapidly and have a greater effect in the United States where more people own cars. (Mr. Furman argued that people who didn’t buy cars would have spent their money on something else and that simply eliminating them from the U.S. consumption basket is not fair.)
Officials in the Administration have also noted that the United States is experiencing a strong rebound of economic growth. The International Monetary Fund predicted that U.S. production would increase by 6 percent in 2021 and 5.2% in 2022. This compares to 5 percent growth in Europe last year and 4.3% growth projected for this.
“To the extent that we got more heat, we got a lot more growth for it,” said Jared Bernstein, a member of the White House Council of Economic Advisers.
While many nations spent heavily to protect their economies from coronavirus fallout — in some places enough to push up demand, and potentially inflation — the United States approved about $5 trillion in spending in 2020 and 2021. That outstripped the response in other major economies as a share of the nation’s output, according to data compiled by the International Monetary Fund.
Many economists argued for protecting workers and businesses in the early stages of the pandemic. But, others were skeptical about the $1.9 trillion package put together by the Biden administration last March. They argued that households receiving another round of stimulus, which included $1,400 checks, fueled the demand for more when the economy was already recovering.
Consumer spending was a result: Retail sales rose after the checks were issued.
President of the Peterson Institute for International Economics Adam Posen said that the U.S. government spent too little in too little time in the first half 2021.
“If there had not been the bottlenecks and labor market shortages, it might not have mattered as much. But it did,” he said.
What is inflation? Inflation is a loss in purchasing power that occurs over time. It means that your dollar will not get as far tomorrow than it did today. It is usually expressed as an annual change in the prices of everyday goods and services like food, furniture, apparel and transportation.
Americans found themselves with a lot in the bank and as they spent that money to buy goods, demand crashed with a global supply network that was too fragile.
Viruses caused disruption in factories, ports experienced backlogs, and a shortage of truckers disrupted transit routes. The United States was able to buy more goods in 2021 than ever before, and foreign factories still sent record numbers of products to U.S. stores and doorsteps. But all that shopping wasn’t enough to satisfy consumer demand.
The Port Los Angeles is a window to the mismatch. The port processed 16 percent more containers last year than it did in 2020, making it its busiest ever calendar year. It still has a large backlog of ships awaiting docking, many of which have been waiting for over a month.
Economists believe that inflation was affected by the extra government assistance families received last year. Inflation was exacerbated by the fact that households were able to spend more money on camping equipment and new kitchen tables, increasing the gap between what consumers want from companies and what they can actually provide.
Businesses raised their prices as goods became scarcer and were more expensive to transport.
Government checks haven’t been alone in driving strong U.S. demand. Because of the virus fears, consumers are unable to plan a trip to Paris or a dinner at a fancy restaurant. Many have instead chosen to remodel their living rooms, making goods a hot commodity. The pandemic caused families to stop spending and lockdowns helped to increase savings stocks.
And the Federal Reserve’s interest rates are at rock bottom, which has bolstered demand for big purchases made on credit, from houses and cars to business investments like machinery and computers. According to data from the Federal Reserve Bank of New York, families have been taking on more home and auto loans, which helps to stimulate these sectors.
However, if stimulus-driven inflation is fueling it, there may be a silver lining to the diagnosis. It might be easier to temper consumer spending rather than to quickly reorient tangled supply chains.
People might naturally reduce their purchases as the government cuts back on assistance. If the pandemic ends, spending could shift from goods to services. And the Fed’s policies work on demand — not supply.
Source: NY Times