Consumer demand has been key driver of inflation in the US
By Ana Swanson
Supply chain bottlenecks and labor shortages have been a major factor driving inflation in the United States, though surging consumer demand ultimately did more to drive up prices in the last two years, according to researchers at the Federal Reserve Bank of New York, the University of Maryland and Harvard University.
In a blog post on Wednesday, Julian di Giovanni, the head of climate risk studies in the New York Fed’s Research and Statistics Group, summarized findings from a paper presented in June that found higher consumer demand for all types of products during the pandemic was responsible for roughly 60% of the inflation in the United States between 2019 and 2021.
Supply shocks — which include shortages of workers, raw materials and shipping containers needed to produce and move goods globally — accounted for the remaining 40% of inflation in the model, with 58 of 66 industrial sectors that the research identified experiencing supply constraints.
The researchers concluded that, without supply bottlenecks, inflation in the United States would have been 6% at the end of 2021, instead of 9%. The research finds that demand shocks played a larger role in explaining inflation in the United States, whereas supply chain bottlenecks have done more to fuel inflation in Europe.
“The bottom line of this decomposition is that supply constraints magnified the impact of higher demand in inflation,” di Giovanni wrote.
The findings provide one answer to a debate that policymakers and politicians have been wrestling with about the nature of inflation, which slowed slightly to 8.5% in July. While many economists point to the government’s generous spending to support Americans during the pandemic as a key factor fueling inflation, the Biden administration has often blamed global supply chain issues and rising fuel prices stemming from the Russian invasion of Ukraine.
The debate has important implications for the actions policymakers can take to fight price increases. The Federal Reserve has aggressively raised interest rates to try to cool consumer demand and the economy, but it has no tools to alleviate supply constraints.
Congress and the Biden administration have begun making big investments in infrastructure and providing incentives for manufacturers of key products like semiconductors to invest in the United States. But the impact from those policies will take years to be felt.
There have been signs recently that supply chain shocks are easing, and di Giovanni said that could be good news for the U.S. inflation rate. In the absence of new energy shocks or other surprises, it’s possible that the easing of bottlenecks in the supply chain “will cause a substantial drop in inflation in the near term,” he wrote Wednesday.