What is causing inflation? Economists point fingers at different culprits
S E E D E D C O N T E N T
Feb. 16, 2022, 4:03 PM UTC / Updated Feb. 16, 2022, 4:17 PM UTC By Phil McCausland
Americans continue to experience and hear about the nation's inflation woes: they're seeing it fairly clearly in gas and grocery prices, and on their news feeds.
The inflation rate has exceeded the 40-year high previously set in December, but what remains unclear to many is what is really causing that inflation and when it will come to an end. Obvious to many is that the pandemic has put its thumb on the economic scale, but what exactly is causing the purchasing power of the dollar to falter remains murky.
That's not just an issue for the average person, however. While most economists tend to acknowledge the same causes of inflation, many disagree which elements are most driving the price increases that continue to vex American consumers.
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Supply chain issues, surging demand, production costs, and swaths of relief funds all have a role to play, they say, but politics tend to cause one to point the finger at the supply chain or the $1.9 trillion American Rescue Plan Act of 2021 as the main culprits.
A more apolitical view may suggest that all have a role to play in shrinking the distance a dollar can travel.
"There's a confluence of factors — it's both," said David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. "There's a lot of things that pushed up demand and a lot that's kept supply from responding accordingly, as a result we have inflation."
He said it is inarguable that demand in a pandemic economy surged because of very aggressive fiscal and monetary policies in response to Covid-19. The Obama administration's stimulus package to respond to the 2008 recession was $787 billion; the pandemic stimulus packages, between the Trump and the Biden administrations, reach around $5 trillion.
That huge sum of money has helped demand come back, but unfortunately the supply chain remains hampered. Hindsight, Wessel said, is 20/20 but he believes the policy was necessary for an even recovery.
Dean Baker, the co-founder of the left-leaning Center for Economic and Policy Research, agrees. To build an even recovery across the country, that aid was necessary.
Still, he said, while the stimulus has had a positive effect on the economy, it came as the pandemic drove people to buy products rather than services. Those purchases of couches, cars, refrigerators and other items came as the country's supply chain remained beleaguered, which drove up demand.
"I see it as secondary," he said, "but there's no doubt it was a factor in driving inflation."
There remains about $300 billion from the act that is destined to go to states. Experts argue that the Biden administration overheated the economy and ignored signs it was bouncing back.
"Fiscal policy has been extraordinarily aggressive, and the main example was the American Rescue Plan that was enacted last March, which shot a $1.9 trillion bazooka into a $420 billion output gap," said Brian Riedl, a senior fellow at the Manhattan Institute and a former chief economist for Sen. Rob Portman, R-Ohio.
The Biden administration, however, is adamant that the American Rescue Plan Act has not driven inflation. Instead it points to the supply chain struggles and corporations independently driving up prices.
The White House has also noted the inflationary challenges faced by other countries, arguing this is not an issue of policy but a difficult period driven by the pandemic that many nations are facing.
"Over the past six months, price increases in the United States and Europe have basically run neck and neck," White House press secretary Jen Psaki said last month when the January inflation numbers were released. "In December, the E.U. saw its highest recorded inflation on record. Germany saw its highest inflation, in December, since reunification. And so, while there are differences country by country, this is a global phenomenon and driven by these global issues."
What remains inarguable though is this period of inflation is torturing the White House's political ambitions.
After losing the battle for Build Back Better to Sen. Joe Manchin, D-W.V., the Biden administration has been aiming to work through pieces of the policy package that consists of around $2 trillion of spending and tax cuts.
It appears February's inflation numbers of 7.5 percent have changed the dimensions of that conversation, particularly after Manchin — a pivotal vote in the Senate to pass any Democratic package — said so-called "inflation taxes" were "draining the hard-earned wages of every American.
"It's beyond time for the Federal Reserve to tackle this issue head on, and Congress and the administration must proceed with caution before adding more fuel to an economy already on fire," Manchin said after the most recent inflation numbers were released. "As inflation and our $30 trillion in national debt continue to climb, only in Washington, D.C., do people seem to think that spending trillions more of taxpayers' money will cure our problems, let alone inflation."
Some argue corporations could have a bigger role in tamping down prices or helping their employees meet them without raising prices further.
What Baker and other economists fear more than anything, however, is a wage-price spiral, which is when workers demand higher wages to pay for rising prices, and in response, businesses raise consumer prices to evenly match those costs.
Baker said he's not demonizing corporations, but it is clear that they have enjoyed outsize profits over the past two years.
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"I think it's very clear in the data that there was a big shift towards profits in the last two years," he said. "What's going on is that companies in response to shortages are raising prices, and that's disproportionately going to their profits. My takeaway is that there's room for them to pay higher wages without seeing their profits squeezed."
The Federal Reserve, meanwhile, has signaled its intent to raise interest rates to address inflation. That would likely help tamp down consumer spending on large purchases and further aid in cooling down the economic situation.
Just stating its intention, Riedl said, will begin to help. It remains to be seen, however, how high the central bank will raise interest rates.
"They need to be careful because we're still pretty weak coming out of a recession and the economy could pretty easily be pushed back downward," he said.
"Additionally, raising interest rates doesn't fix the supply chain. Until we get that resolved, we're not going to be able to fully solve inflation."
Phil McCausland is an NBC News reporter focused on health care and the social safety net.
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The pandemic was the first domino in the inflation causal chain (and it was a big one).
What? I thought it was all President Biden's fault?
It's happening on Biden's watch...the voters will blame him.
Why not blame somebody more appropriate? Somebodies that can do something about it? There is talk that some private companies feel justified in the short-term recouping some of their losses—especially before the next big interest rate change.
You are absolutely correct. I believe Senator Manchin called it correctly when he said it's past time the Federal Reserve tackled inflation head on.
Things are getting pessimistically bad in the short-term with long-term effects. We are having chain stores (in my area) consolidate multiple locations into one now, some others are pricing themselves 'up' and its killing buying power as products sat and sat, there are cold foods shelves empty again-due to lack of restock, and finally there is this inordinate amount of theft going on: businesses can keep up! The best hope I guess if when this all ends we will have a new and 'improved' landscape?
Ridiculous.
Energy is usually one of the biggest causal factors in inflation. it affects nearly every sector of the economy. This time is no different. Gasoline costs up, natural gas prices up, electric prices up.
We went from exporting energy to begging OPEC to open up the spigots.
The Pandemic and wage inflation certainly didn’t help but energy inflation remains the king of the causes. Nothing new there.
What, specifically, is ridiculous ... the entire article?
Of course energy inflation is a key factor given the cost of energy is factored into the costs of everything we produce and supply. Is the article ridiculous because it focused on more root causes such as the pandemic? The pandemic reduced demand, reduced the workforce, reduced production (on energy too), etc. and the return to work increased demand (on energy too) which taxed the diminished supply chain resulting in a rise in the CPI. Note also that the pandemic has also been used as an excuse by businesses to increase prices.
On crude-oil in particular:
Well this time we have a new, unique ugly factor at play: the pandemic is the current 800lb gorilla. It triggered myriad ill-effects and energy is one of them. It is far from 'ridiculous' to see the pandemic as a dominant factor in the inflation we are now experiencing.
I already explained why it’s ridiculous. Guess you didn’t read it. It’s ridiculous because it’s an article on causes of the current state of inflation and it basically doesn’t even mention the arguably largest cause.
Energy.
I guess these economists and reporters got their marching orders to not mention the inconvenient truth here
That said, if production here isn’t an issue, why is Biden asking others to ramp up production? The fact remains the Biden admin started on a US anti fossil fuel policy the day they got in office.
Biden owns the portion of inflation caused by energy cost increases. Lock, stock and barrel.
I read your brief comment and added a lengthy reply. You cannot comprehend that I am addressing what you wrote??
Real simple: the root cause of current inflation is the pandemic. The pandemic is the root cause of the energy price inflation that we are currently experiencing which in turn causes increases in costs of production which ultimately are reflected in the CPI. The pandemic also stressed the supply chain and gave excuses for businesses to raise prices which is also reflected in the CPI.
By the way, from your link:
Nah, like usual you either can’t or won’t comprehend what I’m saying. Nothing new there. No worries though since as preciously noted your opinion means nothing to me.
Energy IS the largest cause of inflation today. It’s important for folks to understand that and stop blaming the pandemic only.
I have repeatedly noted the role that energy plays in inflation. You ignore it. I have also noted how the pandemic triggered the rise in energy prices. You ignore that too.
Finally, your own link counters your claim.
Analyzing today's economy without considering the dominant factor of the pandemic is a mistake. It leads to flawed conclusions.
.
Energy is an indicator of and is affected by inflation, not a direct cause of inflation.
For example, why did energy prices rise in the 1970's? Because of an OPEC Boycott. Since that time, the oil markets have been commoditized and now have a place in the futures market to level out the effect of agencies such as OPEC. So why do energy prices rise (and fall) now? Because of investors feeling bullish or bearish about the price they will be able to sell a barrel of oil for. Why, then, are the investors feeling the way they do? Because they think that the world will pay them what they ask. So, why do they think the world is going to pay them what they ask? There is your driver of inflation.
As most understand, the economy is extremely complex (and dynamic). Energy costs are indeed a consequence of myriad other factors (including politics).
Further, the causal chain is not simply linear but is a recursive network (feeding on itself at times and canceling effects in other cases).
That said, one correct portion of Sparty's objection, as I noted upfront, is that energy costs do impact the costs of production and distribution. So as energy costs rise, so will the cost of everything else which can turn into a noticeable rise in the CPI.
His analytical flaw is downplaying the dominant factor of the pandemic and its effect on human resources, supply, the supply chain, wages, demand and the psychology which enables businesses to raise prices / reduce service levels, etc.
As anyone with a modicum of understanding of basic economics knows, inflation is just measure of how the costs of consumer goods are going up in comparison to the past and causing a reduction of moneys purchasing power.
Energy is a cost the affects nearly every other sector of the economy. The gasoline that fuels your vehicle, the natural gas or propane that fuels your boiler or furnace, the fuel used to transport nearly all the consumer goods you use, the power to keep your lights on, etc, etc. The supposition that energy doesn’t directly cause inflation is one of the stupidest thing I’ve ever heard.
All you internet geniuses can stroke your egos all you want. You can’t escape the ever present and persistent fact that Energy cost increases are a leading cause of inflation.
With that, I’ll leave this circle jerk of a debate to the usual internet geniuses here. Have fun boys .....
When you read an increase in the CPI you should recognize a reference to that very notion. You present this as if you are making some grand observation that has not already been noted.
I have stated that several times. Even recently in the post above yours:
I do not believe anyone has suggested that energy does not play a critical role in costs of production and distribution and thus in consumer prices. You repeat this as though someone is disagreeing. I disagree with you that energy costs are the root cause of current inflation; not that rising energy costs have no effect on the CPI.
Where exactly do you find anyone in this seed making that supposition? What words are needed for you to comprehend acknowledgement of the causal relationship of energy costs with the CPI?:
Seems clear to me.
Again, who has suggested that the cost of energy is NOT an important factor in costs ...? The pandemic is the root cause of our current inflation. It has caused energy costs to increase with all the normal side-effects.
Enough of your trolling. Move on.
The fact is the pandemic (once in a lifetime) is responsible for 'shortages' in personnel across the world-wide. Yes, energy production falls under the control of the president-thus, you constant re-frame to "make it so!" remarkably to complain about this president's administration. We should be better than this. And yet, when this president is trying to deal with a major player like Russia rumored for months to be starting a war and subsequently shutting off its supply of "energy" to European countries and affecting world markets -unremarkably you do not hold your party responsible for not FACILITATING in aiding this president TO DO THE RIGHT THING FOR THE U.S.A. through congressional means.
SOSDD, when the cause is just the need for another 'fall-guy.'
The human resources are in free-fall transition (as can be expected during a once in a lifetime respiratory virus (how we exchange body gases)) and the supply chain for semi-conductors shortages (which could be even more pronounced if nations had chosen to IGNORE the presence of SARS-2 Covid virus and managed to kill off more of semi-conductor workers through ignoring the pandemic)
Of course, when all else (nearly) fails to get one's way: go bombast and diminish the good discussion as a whole. So transparent in its execution. Chalk it up under the heading:
"Don't Give Them The Sanctification."
DEPARTMENT OF OOPS!
"Don't Give Them The Satisfaction."
I liked the first way better...
I agree with the following statements:
Just because energy has an effect on the cost of other aspects of the economy does not mean that it is the root cause of inflation. Some factor or factors has to make the price of energy increase. What these factors are and the relative effects of each is constantly changing, which is why the price of energy is so volatile.
I am going to presume that you have this understanding, so why the contention that the price of energy is the de facto driver of inflation when the price of energy itself is controlled by a myriad of factors, some more controllable than others?
If you were investigating a gunshot death, would you stop when you found the gun that was used in the crime? "There we go. The gun did it!" or would you keep digging until you found out who pulled the trigger and why?
I am willing to stand by my assertion that energy costs are not by and of themselves the driver of inflation, especially in this instance. That said, energy prices are an integral part of the economy and cannot be discounted as an indicator of underlying causes, but not the direct driver of inflation.
Economics is a crapshoot: A web of competing drivers with a whole lot of wildcards thrown in, so you can rarely determine, beyond the shadow of a doubt, the true Causes of any one outcome. I will now go mix my metaphors somewheres else.... Good Day.
Remember the early days of the SARS 2 Covid-19 virus, how some conservatives would NOT accept that citizens, citizens mind you were dying of the virus? These folks argued us down that underlying causes were the 'root' cause of every (Covid-infected) death. This is Covid denial redux.
Inflation happens when the increase in the supply of money (demand) exceeds the increase in production (supply) of goods and services resulting in more dollars chasing available goods. For the last fifteen years Fed policy was actually geared to counteract deflationary forces. Supply should always eventually catch up with demand under normal market forces. The basically flatlined inflation of the last two decades is actually abnormal and the low interest rates available during this period were always unsustainable long term if our country wants to grow our economy. Today's homeowners are reaping a bonanza of equity that was a long time in the making but was really baked into the system by economic policy going back many years. It is called an economic or fiscal cycle. In the long run growth and some inflation is way better for the most people than are deflation and artificially low long term interest rates which always result in speculation, bubbles and then inevitability in market crashes and economic recessions...
Our federal government spent an enormous amount of money on Covid-19 relief, in both absolute terms and as a share of our world-leading GDP. We’ve spent over $5.3 trillion in total, amounting to nearly 27 percent of our GDP. The European Union, which has a combined GDP almost as large as China’s, spent only about 11 percent on Covid relief. The U.K. spent just over 18 percent. Canada clocked in just shy of 20 percent. All are experiencing inflation. None are experiencing it to the extent the U.S. is.
When you factor in additional outlays — such as the recent $1.2 trillion “infrastructure” bill, plus our pre-pandemic annual budget deficit of about $1 trillion (which is not going away) — the federal government is spending like a drunken sailor, even compared with our most profligate competitors.
The first $4 trillion or so in bipartisan Covid relief was arguably justifiable. If you plot out the inflation rate from the start of the pandemic, the relatively modest increase over the course of 2020 merely canceled out the precipitous drop in inflation that took place early in the pandemic, when demand was suddenly cut by lockdowns.
But inflation took off in early 2021, when the Biden administration insisted on another $1.9 trillion in Covid relief because the new president wanted to take credit for the inevitable post-pandemic recovery.
Trump's 2020 budget deficit was the biggest ever!
Government spending leads to inflation but typically after a substantial lag.
Spending to help ease the pain of the pandemic is no doubt a significant contributor to the difficulty in getting workers and in the subsequent rise in wages. Thus, as you suggest, government actions in response to the pandemic have contributed to factors which lead to inflation.
The root cause, however, is the pandemic. Without the pandemic we would have not seen relief checks, etc. and businesses would have not been forced to slow down production / services due to greatly reduced demand and a compromised workforce.
Note, I am NOT defending federal spending nor suggesting it has no impact on the CPI. I just find it impossible to ignore the 800lb gorilla in the room — the pandemic.
They know this. Such commenters are not 'blind' to the pandemic. However, it is their CONTENTION borne out of a warp sense of consistency that (as they have said since the start of the pandemic- the pandemic should not have played any substantial role in the economic growth and development of the U.S. That is, we should have kept working through the pandemic at max 'outlay.' Nevermind, the millions that would have been dropping where they stood without breath in their lungs.
This is the gist of where some conservatives' passion for this discussion resides: This nation should never have done anything through capitalization (debt spread over the long-haul in years) due to this pandemic!
For the sake of some conservatives' "coherence" to their statements on the virus, this is why they WON'T let the pandemic be the 'root' cause. They simply won't accept the ready truth when it goes against their core narrative. IGNORE THE 800 POUND GORILLA of Sars-2 Covid Virus 4 - do not accept its essential response under any circumstance!
The pandemic provided great cover for unnecessary government spending.
Standard some conservative talking point! Goodness! Ssome people can be impossible! Take stock of the lengths some conservatives will go (including allowing themselves to die) to not AID those citizens in this country they 'Otherize.'
I agree, but I would use the word misapplied rather than unnecessary.
The seeded article notes in more than one place that corporate profits are involved any inflationary surge. If it was just an energy problem we wouldn't see corporate profits surging.
Corporate profits are directly related to rising prices and vice versa. One wonders if the average American person is ever going to realize that ever-growing corporate profits only benefit those who can afford to have substantial stock holdings.
Funny how intertwined this all is. Retirement, college-tuition, etc. programs are often based on securities and those are affected by growing profits.
We have done a fine job (not that this was necessarily intentional) of tying most every aspect of life to corporate profits.
Counterintuitively, who was it that when ask said, "I rob banks because that is where the money is." Congress, dutifully, has intertwined corporate profits throughout our institutions because both (all) political parties technically in a capitalistic republic are over-sighted by those with 'hands on' the most monies. Congress-the "peoples' representative body and corporations - the head of capitalism.
A lot of the inflation we're seeing comes from companies raising prices on their goods in order to increase profits . We don't see much of this in the analysis coming from , oh, corporate media.
The pandemic provides a great cover for raising prices.
Lol. Corporations are raising prices because their labor and supply costs are going up.
even the Biden administration knows better than to make such an argument
What is the cause of CEO (excessive) salary increases? What means provide the basis for this?
Profit margins are increasing as well as profits. The latter can be partially seen as a function of demand (more sales, more profits) but profit margins are a direct reflection of the price vs. the cost of production. This means that the companies raised prices more than any additional expense from any source.
Whatever the cover story, prices have increased by more than the total cost of production, making profit margin increases one of the large drivers of inflation.
Approximately 50% of the US GDP is small business. Our profit margins are not going up. They are staying flat or going down. That is not to say our prices aren’t going up. They are.
Labor costs are up
Materials costs are up
Transportation costs are up
Service costs are up
Etc, etc ..... it’s pretty simple. Raise prices or go out of business.
Seems that some critical points are being missed. The article states the profits of the corporations. They are at record levels, thus they as an entity will add to the inflations woes.
The rising fuel prices are not unique to the US. Our neighbor to the north is a major producer of oil yet the costs are exploding in Canada and not likely to fall back for some time.
US oil production is still well below 2019 (pre-pandemic) in the US. This is an interesting article on just that and he has nothing to do with KPL which is a false flag argument.
As far as food goes, check out the profits of the major beef/chicken/pork producers.
The latest food item that is going to greatly increase in price will be avocados. The US has restricted imports of avocados from Mexico due to threats against our inspectors in Mexico among other things.
The US is not the only country experiencing inflation, much of the world is in the same situation.
Did ya notice that Apple Board is considering not giving Cook his "$100M" bonus/pay package for the year?
And, that DOJ is going to initiate investigations into corporations for "Illicit profits"????