Speedy Inflation Fuels Debate Over What’s to Blame: Pandemic or Coverage


The price hikes hitting consumers, businesses and policymakers worldwide have sparked a heated debate in Washington over how much of today’s rapid inflation is due to policy decisions in the United States and how much is due to global factors surrounding the pandemic is, such as B. Disorganized supply chains.

At a moment when stubbornly rapid price hikes are weighing on consumer confidence and creating political liability for President Biden, White House officials have repeatedly blamed high inflation on international forces, including factory closures in Asia and congested shipping routes causing bottlenecks and upwards drive prices everywhere. Officials are increasingly citing high inflation in places like the eurozone, where prices are rising at an all-time high, as a sign the world is experiencing a shared moment of price pain, and shifting the blame away from US policy.

But a chorus of economists points to government policies as a big part of the reason US inflation is at a 40-year high. While they agree prices are rising as a result of shutdowns and supply chain problems, they say America’s decision to flood the economy with stimulus money has helped spur consumer spending and exacerbated these global trends.

The world trading machine is producing, shipping, and delivering more goods to American consumers than ever before as people use cash to buy sofas, cars, and home office appliances, but supply chains simply have not been able to keep up with this inflated demand.

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

The White House has attempted to counter inflation by boosting supply — announcing measures to unclog ports and trying to boost domestic manufacturing, all of which will take time. But rising inflation has already threatened Mr Biden’s ability to pass a sweeping social policy and climate bill over fears that more spending could contribute to inflation. Senator Joe Manchin III, the West Virginia Democrat whose vote is critical to passing the bill, has cited rising prices as one reason he will not support the bill.

The demand side of today’s price hikes may prove easier for policymakers. The Federal Reserve is preparing to hike interest rates to make borrowing more expensive and slow spending in a recipe that could help tame inflation. Decreasing state aid for households can of course also reduce demand and ease price pressure.

Inflation has accelerated sharply in the United States, with the consumer price index rising 7 percent for the year to December, the fastest pace since 1982. But it has also risen sharply in many countries in recent months, a fact that Government officials have stressed.

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

Indeed, supply disruptions are leading to higher inflation in many places, including in large emerging markets like India and Brazil and in developed economies like the eurozone. Data released in the United Kingdom and Canada on Wednesday showed prices in both countries accelerating at the fastest rate in 30 years. Inflation in the euro zone, which is measured differently than in the US, climbed to an annual rate of 5 percent in December, according to a first estimate by the European Union’s statistical office.

“The US is hardly an island in the midst of this storm of supply disruptions and rising demand, particularly for goods and commodities,” said Eswar Prasad, professor of trade policy at Cornell University and a senior fellow at the Brookings Institution.

However, some economists point out that although inflation is spreading around the world, it has been more pronounced in America than anywhere else.

“The United States has had a lot more inflation than almost any other advanced economy in the world,” said Jason Furman, an economist at Harvard University and a former economic adviser to the Obama administration, who used similar methods to look across sectors and came to the conclusion that US prices were rising consistently faster.

The difference, he said, stems from the fact that “the United States’ stimulus is in a category of its own.”

White House officials have argued that the differences in “core” inflation – which excludes food and fuel – between the United States and other major economies have been small over the past six months. And the gaps almost disappear if you exclude auto prices, which have risen sharply and are having a bigger impact in the United States, where consumers are buying more cars. (Mr. Furman argued that people who didn’t buy cars spent their money on something else and that simply removing them from the US consumption basket isn’t fair.)

Government officials have also noted that the United States has experienced a robust recovery in economic growth. The International Monetary Fund said in October that it expects US production to grow 6 percent in 2021 and 5.2 percent in 2022, compared with growth of 5 percent last year in the euro zone and forecast growth of 4 percent .3 percent for this year.

“To the extent that we’ve gotten more heat, we’ve gotten a lot more growth in return,” said Jared Bernstein, a member of the White House Economic Advisory Council.

While many nations spent heavily to protect their economies from the fallout from the coronavirus — in some places enough to spur demand and potentially inflation — the United States approved about $5 trillion in spending in 2020 and 2021. That outpaced the response in other major economies as a percentage of national output, according to the International Monetary Fund.

Many economists supported protecting workers and businesses early in the pandemic, but some criticized the size of the $1.9 trillion package last March under the Biden administration. They argued that sending another round of stimulus to households, including checks worth $1,400, further boosted demand when the economy was already recovering.

Consumer spending seemed to be responding: retail sales, for example, skyrocketed after checks cleared.

Adam Posen, president of the Peterson Institute for International Economics, said the US government overspent in too little time in the first half of 2021.

“If it weren’t for the bottlenecks and bottlenecks in the job market, maybe it wouldn’t have mattered so much. But it worked,” he said.

Frequently asked questions about inflation

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the price of essential goods and services such as groceries, furniture, clothing, transportation and toys.

What Causes Inflation? This may be the result of increasing consumer demand. However, inflation can also rise and fall on developments that have little to do with economic conditions, such as E.g. limited oil production and problems in the supply chain.

Is inflation bad? It depends on the circumstances. Rapid price increases mean problems, but moderate price increases could also lead to higher wages and job growth.

Can inflation affect the stock market? Rapid inflation usually spells trouble for stocks. Financial assets in general have historically performed poorly during inflationary booms, while tangible assets like houses have held up better.

Americans found themselves with lots 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 catch up.

Virus outbreaks crippled factories, ports faced backlogs and a shortage of truckers strained transit routes. Americans still managed to buy more goods than ever in 2021, and foreign factories were sending a record amount of products to US stores and doorsteps. But all these purchases were not enough to meet consumer demand.

The Port of Los Angeles is a window into disproportion. The port had its busiest calendar year on record last year, processing 16 percent more containers than in 2020. Even so, it still has a huge backlog of ships waiting to dock, some of which have been waiting a month or more since Friday .

The extra help the government gave to families over the past year has had an impact on inflation because of these shortages, economists said. By giving households more money to buy camping gear or a new kitchen table, the gap between what consumers wanted and what companies could actually deliver widened.

As goods became scarce and transportation more expensive, companies raised their prices.

It’s not just government checks that have fueled strong US demand. As virus fears keep consumers from planning a trip to Paris or a fancy dinner at a restaurant, many have instead turned to living room makeovers, making merchandise an unusually hot commodity. Lockdowns that forced families to abruptly halt spending early in the pandemic helped swell savings stocks.

And Federal Reserve interest rates are at rock bottom, which has fueled demand for large loan purchases, from homes and cars to business investments like machines and computers. Families have taken on more housing and auto debt, data from the Federal Reserve Bank of New York shows, helping to boost those sectors.

But if stimulus-driven demand fuels inflation, the diagnosis could have a silver lining. It may be easier to rein in consumer spending than to quickly realign tangled supply lines.

People could, of course, start buying less as government aid wears off. Spending could shift away from goods and back to services as the pandemic eases. And the Fed’s policy is on demand, not supply.