Inflation: Why? That’s the question many consumers have been finding themselves asking lately. Followed by inflation: Fix?

We’re in quite a conundrum when it comes to rising prices. Inflation is at a 40-year high in the United States and accelerating around the globe. The situation may very well get worse before it gets better, as Russia’s war on Ukraine stands to exacerbate price pressures, as does a new round of lockdowns in China due to Covid-19.

Among economists and experts, there’s no strict consensus about what exactly is to blame. There are certain factors widely agreed upon that we’ve been hearing about for months: supply chain woes, rising oil prices, shifting consumer demands. These concerns have hardly subsided. But there are other arenas where there’s more disagreement, such as the role government stimulus has played in increasing prices, and the possibility that corporate greed is an important factor.

There’s also no clear agreement on what the solution is. The Federal Reserve is starting to make moves to try to tamp down inflation, but it’s going to take time for that to have an impact. It’s still uncertain how aggressive the Fed will be or what risks those fixes could pose for the broader economy. The White House is trying to combat price increases, but there’s not really a ton it can do.

“They’re actually doing the right thing, they just don’t have many tools,” said Jason Furman, a Harvard economist and former adviser to President Barack Obama. He said one thing they can do and are doing is to be “realistic in leveling with people” that of course they don’t like inflation, and this isn’t a problem that will solve itself overnight.

While a lot is unknown, one thing seems pretty clear to most: Much of this is the result of factors that have been brewing for quite some time; some back to the start of the pandemic, many even longer. As for when it will be over, we’re likely to be in this situation for a while.

“A lot of people early on in the pandemic were saying it’s just the pandemic, it’s temporary, it’s going to go away on its own,” said Lauren Melodia, deputy director of macroeconomic analysis at the Roosevelt Institute, a progressive think tank. “At this point, we’ve seen it show up in other things, like housing, where it can’t just be the pandemic.”

The answer to the question of exactly why inflation is happening is kind of hard

Whichever economist or expert or policymaker you ask to explain the current inflation story to you is going to tell you something slightly different. I asked a bunch of economists over the past couple of weeks what was causing inflation and how to fix it. Most kind of laughed for a second before launching into their cases, acknowledging the full answer is, to a certain extent, ¯\_(ツ)_/¯.

So let’s start with the things most experts generally agree on. For starters, the past couple of years in the economy have been … weird, due in large part to the pandemic. On the supply end, a bunch of industries saw slowdowns and shutdowns when Covid-19 hit, which made it hard to produce and maintain business as usual. The supply chain is global, as are commodities, so even if things were a-okay in the US (which they are not), what happens everywhere else makes a difference.

At the same time, what consumers want has shifted, moving spending from services (remember when restaurants and hair salons weren’t an option?) to spending on goods instead, which haven’t been so readily available (remember the huge runs on lumber and dumbbells?).

“There are shortages of physical goods people want,” said Damon Silvers, director of policy and special counsel for the AFL-CIO. On top of shortages of the goods themselves, it’s also proven tricky to move said goods around. Ports have been clogged; trucks are expensive and in short supply. “After decades of underinvestment in infrastructure, our system for moving goods to market turned out to be very vulnerable,” Silvers said.

Skanda Amarnath, executive director of the advocacy group Employ America, explained that the pandemic exposed a lot of underinvestment that’s been happening in the country for a long time. It turns out if companies and government don’t invest in infrastructure to make business run smoothly but instead constantly try to cut costs and corners at every turn, that matters. “It all stems back, to me, that a lot of underinvestment has been exposed at a time when the economy is recovering,” he said.

That recovery part is important. As much as many people say that they feel bad about the economy right now, the economy is actually pretty decent. Unemployment is relatively low, many people still have quite a bit of money to spend, and the recovery, in a lot of ways, looks pretty solid. But again, therein lies part of the problem: People have money to spend, but not so many places to spend it. “There are multiple things that are happening all at once right now. The pandemic is still going on, we still have supply chain bottlenecks around the globe, parts of the economy are getting up to speed,” Amarnath said.

Climbing oil prices, which translate to climbing gas prices, are also contributing to inflation. Even before the pandemic, energy and gas prices were on the rise, but now, the situation with Russia stands to make things worse. Russia doesn’t have all the world’s oil, but it has enough of it to make a difference, in the US somewhat and more so in Europe. Moreover, Russia’s war on Ukraine and the resulting sanctions are pushing up prices elsewhere on commodities, such as wheat.

“We already had pretty quickly increasing energy prices and commodity prices which now have, of course, exploded, so you get another round of intense cost pressures that affect a wide range of industries,” said Isabella Weber, an economist at UMass Amherst.

Covid-19 is also a continuing factor in inflation, which some people tend to forget. Even if you are living your life mask-free, it doesn’t mean other people are, not only in the US but, probably more importantly, abroad. China is very strict on Covid-19, and China is a very important part of the global supply chain. Covid is on the rise again there, so it’s going to screw up supply chains and, in turn, contribute to inflation. “I’m rather worried,” Weber said of the entire situation.

Everybody is arguing about what else is causing inflation

I would like to be able to tell you a coherent story about inflation where everyone absolutely agrees with all certainty what is going on. But I cannot. So instead, I’m going to pop through some theories that some economists say are contributing and others say are not.

Some experts argue that what’s fostering inflation is that the government put too much money into circulation. Basically, the argument goes, the federal government did three giant stimulus packages pumping trillions of dollars into the economy, and that’s driven prices up. A lot of these people point to the $1,400 stimulus checks that went out in early 2021.

Furman, the Harvard economist, thinks the $1.9 trillion American Rescue Plan signed into law in early 2021 helped create some of the inflation we’re seeing now. “I think by the time we did the American Rescue Plan, the economy was healing rapidly, households had more money in their bank accounts than they’d ever had before, and jobs were being added rapidly. I just think there was no need for anything on that scale,” he said.

Not everybody, or even a ton of people, agrees with this view, but it’s a view out there. Amarnath said he thinks it would “be wrong to dismiss all sources of demand-side support.” But it’s not the basket he’s placing all his eggs in. “It doesn’t seem obvious that all the people who received the stimmy checks spent the stimmy checks on things that proved to be inflationary.”

It does feel a little iffy to say that giving less-well-off people benefits that included a little over $1,000 tanked the economy, given all the support the government gives to corporations and rich people all the time.

Many progressive economists and politicians are beginning to argue that it’s corporate consolidation that’s making inflation worse. They say that companies have a ton of power (they do) and can set prices at whatever they like because there’s not a lot of competition (there often isn’t). They then say that companies are boosting inflation higher by using the problem as an excuse to increase prices so they can make more profits. Matt Stoller, director of research at anti-monopoly think tank the American Economic Liberties Project, argued in December that the pandemic rise in corporate profits accounts for nearly two-thirds of US inflation increases.

“At the end of the day, yeah, corporations do have the power to change prices,” Melodia said.

The point of companies is to make money, so of course that’s what they’re doing right now, even with inflation. “Saying it’s corporate greed implies that we are surprised corporations are greedy, but that’s like complaining that tigers are hungry. The question is what to do about it in terms of antitrust and tax policy,” Silvers said.

At the same time, is consolidation the main thing behind inflation? There’s reportedly some disagreement even within the White House about whether this is a useful argument. Many of the people placing blame on corporate profiteering acknowledge it’s just a part of what’s going on, not the whole story. Some economists dismiss it altogether.

The whole debate is like this: Some economists say rising wages are contributing to inflation, and others present evidence it’s absolutely not the case. Expectations play a role here — when everybody thinks inflation is happening, then businesses start charging more and workers start charging more money to compensate, which makes the whole thing worse.

“Once you have inflation, there’s some self-perpetuation of it,” Furman said. “There’s some passthrough of wages to prices, and some passthrough of prices to wages. Inflation expectations matter.”

If you know exactly how to fix inflation, call me (and by “me,” I mean “Jay Powell”)

There are no easy answers as to how to address rising inflation or quick fixes that will make this entire episode come to an end.

On a domestic level, the Fed, headed by Jay Powell, has started to raise interest rates. That should do something. The idea is that when the Fed raises rates it makes it more expensive to borrow money, which means less spending and less demand. But there’s concern that doing so could push the US economy toward a recession, like what happened after inflation in the 1970s, or that at the very least that it will cost some workers some jobs. Powell has indicated he’s willing to be aggressive about interest rate hikes to combat inflation if need be.

“I think that raising rates, at this point, is more about trying to get lucky,” Furman said. “Maybe it resets inflation expectations and so the self-fulfilling wage-price passthrough goes away. That’s the cheapest and easiest way to bring down inflation, to bring expectations down.”

Brad DeLong, an economist at UC Berkeley, has a modestly more relaxed view on inflation. “My answer is calm down, it’s by and large a desirable part of adjustments. We look out at what people are expecting in the future, and in five to 10 years from now, people are expecting inflation to quiet down. The Fed will do its job,” he said.

Some inflation problems might be out of the Fed’s reach, even domestically. Rent prices, which go into the services bucket, are about to cause more inflation going forward. If you think that part of the problem in that arena is that there’s too little housing, and rising interest rates could make building housing more expensive (because it will be more expensive to borrow), that doesn’t solve the problem. Which is what makes this whole thing complicated.

The White House and President Joe Biden have also taken some measures to try to address inflation, but what they can do is pretty limited (despite some Republicans trying to insist that this is largely Biden’s fault). They’ve rolled out a supply chain task force and made efforts to address issues such as bottlenecks at ports and semiconductor shortages. But it’s not like President Biden has a “stop inflation” button on his desk — which, if he did have one, he would definitely use.

“The White House has been very engaged with the problem of bottlenecks using the ordinary powers of government, but it takes time,” Silvers said. “The administration is addressing longstanding problems in our infrastructure and our manufacturing base that were allowed by prior administrations to go on for years and, in some cases, decades.”

“The advantage of the pandemic is it has thrown our economy into disarray to the extent that people are asking big questions about how do we come up with long-term solutions. The downside is that there’s no quick fix,” Melodia said.

If inflation really persists, the federal government could look into raising taxes or cutting spending, but some of that wouldn’t just entail the White House; you’d also need Congress.

Much of what’s causing inflation is also beyond the United States’s borders. Oil is a global commodity, and Russia’s war on Ukraine has pushed oil prices up even more than they were before. There’s very little the US can do about China’s zero-Covid policy, and even if China tweaks it, the virus there and elsewhere will create supply chain disruptions again.

We’d already seen the effect of supply chain issues and the pressure of commodity and energy prices prior to the war, Weber explained, but it has become worse in recent weeks. She noted that international cooperation would likely be needed to try to stabilize some commodity markets.

“It seemed like an expectable type of outcome from the war and the sanctions that you would get very major turmoil in the commodity markets,” Weber said. “Given how sectoral this inflation is, I think we need more policy action that is targeted to specific sectors.”

Again, different ideas for fixing inflation depend on what you think is causing it. For those in the camp that government stimulus and an overly accommodative Fed are part of the problem, that means that in the future, they’ll push for less stimulus and a less lenient Fed. For those in the corporate power camp, solutions look like better antitrust enforcement, taxes on corporate profits, or maybe even price controls. There are plenty of ideas out there about strategies to address issues in oil supply and to combat some inflationary pressures through health care policies, among others.

More broadly, some of the fixes for inflation are just going to take some time. Production capacity will get moving again, demand will cool off, maybe some necessary investments will be made.

It would be nice if there were one neat trick to solve inflation. There is not. The good news is, things will probably get better eventually. They just might get worse — and in turn cause a lot of pain — first.

source https://www.vox.com/the-goods/22994731/inflation-rate-russia-gas-prices-jerome-powell

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