Rapid inflation fuels debate over what’s to blame: pandemic or politics


The price increases plaguing consumers, businesses and policymakers around the world have sparked a heated debate in Washington about how much of today’s rapid inflation is the result of policy choices in the United States and how much stems from factors related to the pandemic, such as congested supply chains. .

At a time when stubbornly rapid price rises are weighing on consumer confidence and creating political liability for President Biden, White House officials have repeatedly blamed international forces for high inflation, including government shutdowns. factories in Asia and overtaxed shipping routes that are causing shortages and driving up prices everywhere. Officials increasingly cite high inflation in places like the euro zone, where prices are soaring fastest pace ever, as a sign that the world is experiencing a shared moment of price pain, deflecting blame away from US policy.

But a chorus of economists says government policies are a big part of why US inflation is at its highest level in 40 years. While they agree prices are rising due to shutdowns and supply chain issues, they say the US decision to flood the economy with stimulus money has helped accelerate consumer spending , exacerbating these global trends.

The global trading machine is producing, shipping and delivering more goods to American consumers than ever before. .

Kristin J. Forbes, an economist at the Massachusetts Institute for Technology, said “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 fight inflation by boosting supply – announcing measures to unclog ports and trying to speed up time-consuming domestic manufacturing. But rising inflation has already jeopardized Mr Biden’s ability to pass a sprawling social policy and climate bill, fearing more spending could contribute to inflation. Sen. Joe Manchin III, the West Virginia Democrat whose vote is essential to pass the legislation, cited rising prices as one of the reasons he will not support the bill.

The demand side of today’s price increases may prove easier for policymakers to address. The Federal Reserve is preparing to raise interest rates to make borrowing more expensive, slowing spending, in a recipe that could help tame inflation. The reduction in government assistance to households could also naturally lower demand and ease price pressures.

Inflation has picked up sharply in the United States, with the consumer price index climbing 7% in the year to December, its fastest pace since 1982. But in recent months, it has also risen sharply in many countries, a fact that administration officials have pointed out.

“Inflation has everything to do with the supply chain,” President Biden said during a press conference on Wednesday. “While there are differences from country to country, this is a global phenomenon and driven by these global issues,” White House press secretary Jen Psaki said after the the latest inflation data has been released.

It is true that supply disruptions lead to higher inflation in many places, including major developing economies like India and Brazil and developed countries like the euro zone. Data published in the UK and in Canada Wednesday showed prices accelerating at their fastest pace in 30 years in both countries. Inflation in the euro zone, which is measured differently from how the United States calculates it, soared to an annual rate of 5% in December, according to an initial estimate from the European Union’s statistics office.

“The United States is hardly an island amidst this storm of supply disruptions and growing demand, especially for goods and commodities,” said Eswar Prasad, professor of trade policy at the University. Cornell and Senior Fellow at the Brookings Institution.

But some economists point out that while inflation is proving to be pervasive around the world, it has been more pronounced in America than elsewhere.

“The United States has had far 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 has used methodologies comparables to examine the domains and concluded that Price increases in the United States have always been faster.

The difference, he said, comes from the fact that “the recovery of the United States 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. And the gaps almost disappear if you exclude car prices, which are rising sharply and have a greater impact in the United States, where consumers are buying more automobiles. (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 US consumer basket is not fair.)

Administration officials also noted that the United States has seen a robust rebound in economic growth. The International Monetary Fund said in October that it expects U.S. output to grow 6% in 2021 and 5.2% in 2022, compared to 5% growth last year in the euro zone and growth of 4.3% expected for this year.

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

While many countries have spent heavily to shield their economies from the fallout of the coronavirus — in some places, enough to drive up demand and potentially inflation — the United States has approved around $5 trillion in spending in 2020 and 2021. This overtook the response in other major economies as a share of domestic output, according to data compiled by the International Monetary Fund.

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

Consumer spending seemed to react: Retail sales, for example, jumped after the checks were issued.

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

“If it hadn’t been for the bottlenecks and shortages in 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 too fragile to catch up.

Virus outbreaks shut factories, ports faced backlogs and a shortage of truckers disrupted transit routes. Americans again managed to buy more goods than ever in 2021, and foreign factories sent a record amount of products to stores and doors across the United States. But all these purchases were not enough to meet consumer demand.

The Port of Los Angeles is a window into the shift. The port had its busiest calendar year last year, handling 16% more containers than in 2020. Despite this, it still has a huge backlog of ships waiting to dock, including several, since Friday, had been waiting for a month or more. Following.

The extra help the government provided to families last year had an impact on inflation because of those bottlenecks, economists said. Giving households more money to buy camping gear or a new kitchen table widened the gap between what consumers wanted and what companies could actually provide.

As goods became scarcer and began to cost more to transport, companies raised their prices.

Government checks weren’t the only boost to strong US demand. As virus fears keep consumers from planning a trip to Paris or dinner at a fancy restaurant, many have instead turned to living room renovations, making the goods an exceptionally hot commodity. Lockdowns that have forced families to suddenly stop spending early in the pandemic helped inflate savings stocks.

And Federal Reserve interest rates are at record lows, which has boosted demand for large purchases made on credit, from homes and cars to business investments like machinery and computers. Families have been take on more housing and auto debt, data from the Federal Reserve Bank of New York shows, helping to inflate these sectors.

But if stimulus-induced demand is fueling inflation, the diagnosis could come with a silver lining. It may be easier to temper consumer spending than to quickly redirect tangled supply lines.

People may naturally start buying less as government assistance fades. Spending could shift away from goods and back towards services if the pandemic subsides. And Fed policies work on demand, not supply.

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