Rapid inflation fuels debate over what’s to blame: Pandemic or policy
By Jeanna Smialek and Ana Swanson
The price increases bedeviling consumers, businesses and policymakers worldwide have prompted a heated debate in Washington, D.C., 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, such as snarled supply chains.
At a moment when stubbornly rapid price gains are weighing on consumer confidence and creating a political liability for President Joe Biden, White House officials have repeatedly blamed international forces for high inflation, including factory shutdowns in Asia and overtaxed shipping routes that are causing shortages and pushing up prices everywhere. The officials increasingly cite high inflation in places including the euro area, where prices are climbing at the fastest pace on record, as a sign that the world is experiencing a shared moment of price pain, deflecting the blame away from U.S. policy.
But a chorus of economists point to government policies as a big part of the reason U.S. inflation is at a 40-year high. Although 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 have not been able to keep up with that supercharged demand.
Kristin 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 added.
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 Biden’s ability to pass a sprawling social policy and climate bill over fears that more spending could add to inflation. Sen. Joe Manchin, D-W.Va., whose vote is critical to getting the legislation passed, has cited rising prices as one reason 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 down, in a recipe that could help to tame inflation. Fading government help for households may also naturally bring down demand and soften price pressures.
Inflation has accelerated sharply in the United States, with the Consumer Price Index climbing by 7% in the year through December, its fastest pace since 1982. But in recent months, it has also moved up sharply across many countries, a fact administration officials have emphasized.
“The inflation has everything to do with the supply chain,” Biden said during a news conference 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 was released.
It is the case that supply disruptions are leading to higher inflation in many places, including in large developing economies such as India and Brazil and in developed ones such as the euro area. Data released in the United Kingdom and in Canada on Wednesday showed prices accelerating at their fastest rate in 30 years in both countries. Inflation in the eurozone, which is measured differently from how the U.S. calculates it, climbed to an annual rate of 5% in December, according to an initial estimate by the European Union statistics office.
“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.
But some economists point out that even as inflation proves pervasive around the globe, it has been more pronounced in America than elsewhere.
“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.”
Although 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 supported protecting workers and businesses early in the pandemic, but some took issue with the size of the $1.9 trillion package in March under the Biden administration. They argued that sending households another round of stimulus, including $1,400 checks, further fueled demand when the economy was already healing.
Consumer spending seemed to react: Retail sales, for instance, jumped after the checks went out.
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 such as machinery and computers. Families have been taking on more housing and auto debt, data from the Federal Reserve Bank of New York shows, helping to pump up those sectors.
But if stimulus-driven demand is fueling inflation, the diagnosis could come with a silver lining. It may be easier to temper consumer spending than to rapidly reorient tangled supply lines.
People may naturally begin to buy less as government help fades. Spending could shift away from goods and back toward services if the pandemic abates. And the Fed’s policies work on demand — not supply.