The reality, economists say, is that it’s all of those things. And more.
Of course, inflation isn’t inherently a bad thing. In the United States, for the past 40 years or so, we’ve been living with an ideal low-and-slow level of inflation that comes with a well-oiled consumer-driven economy, where prices go up around 2% a year, if that. The current surge in prices reflects an economy roaring back to its fighting weight. What concerns economists and policymakers is when prices keep rising, and when wages don’t rise in kind.
Although wages broadly are also going up, they so far haven’t kept pace with the rising costs of food, energy, housing and everyday consumer goods. People are, understandably, frustrated. Although there’s no one single culprit to blame, here are some of the forces — Covid-19, greedy businesses, the supply chain crisis, the government — you can take your rage out on.
This is an easy one. The pandemic upended everything about our lives, and when the world shut down in the spring of 2020, it was like pulling the plug on the global economy.
But by that summer, demand for consumer goods started to rebound. Big time. Congress and President Biden passed an historic $1.9 trillion stimulus bill in March that put cash directly in Americans’ wallets. And rather than spending money on travel or dining out, we spent on stuff. Lots and lots of it.
Demand went from zero to 100, but supplies couldn’t bounce back so easily. Factories were on lockdown or navigating Covid-19 restrictions, and raw materials were harder to get because of the sudden swell in demand. Shortages of just about everything cropped up, especially workers to unload goods and drive them to their destination. We’re still untangling the mess at ports around the world.
It can feel morally satisfying and politically convenient to blame Corporate America. After all, profit margins are up across industries even as the costs of production have hit record highs.
Analysts say it’s almost impossible to verify how much consumer price increases reflect rising production costs versus a desire to juice profits, but companies aren’t exactly hiding their price flexes. In fact, some are even on record bragging about their “pricing power” — corporate-speak for sticking customers with a bigger bill.
Although there’s some truth to the argument that corporations are making inflation worse, there is a bigger structural problem underpinning the issue: For decades, lax antitrust enforcement has put the concentration of economic power in the hands of a few giants.
The Biden Administration
Republicans have been hammering Democrats and the Biden White House on inflation.
After November’s CPI came in at 6.8%, Senate Minority Leader Mitch McConnell wasted no time pointing fingers. “It is unthinkable that Senate Democrats would try to respond to this inflation report by ramming through another massive socialist spending package in a matter of days,” he tweeted.
It’s true that government spending boosts inflation, but economists have pushed back on the idea that Biden’s ambitious social safety net expansion would inflame price surges. “Worries that the plan will ignite undesirably high inflation and an overheating economy are overdone,” Mark Zandi, the chief economist at Moody’s Analytics, said in July.
Republicans blaming inflation on Biden are also conveniently forgetting the trillions of dollars in spending passed in 2020 that was supported by Republicans and signed by then-President Donald Trump, which economists say have also contributed to inflation.
Money has essentially been free for the past two years, thanks to the Fed’s double-barrel shotgun approach to economic stimulus — interest rates near zero and a massive investment in bonds that keeps yields near rock-bottom.
That stimulus has staved off a lot of financial and economic pain, and was always meant to be temporary. But for months the Fed brushed off inflation concerns, vaguely dubbing price surges “transitory” before that word became almost comically devoid of meaning.
Now, the Fed is finally tapping the brakes. The central bank said last month it would wrap up its stimulus program faster than originally announced, and its updated economic projections show multiple interest rate increases in 2022.