What is going on with inflation?
So why is inflation happening? While there is a lively debate regarding this, there are three different answers. Economists focus on the three issues impacting or not impacting inflation #1 Biden and Trump Buck (the fiscal stimulus packages) #2 expansive monetary policy (fed bond-buying and lowering rates for loans) #3 supply chain disruptions (due to tariffs, the pandemic, and changes in consumption). I lean on supply chains but will run through them all and some solutions.
Biden and Trump bucks. The argument is that we have given households too much cash. That cash is the cause of too much money chasing too few goods. First of the three rounds of cash payments to individuals only amounted to 3200 dollars for two years. Many Americans paid down debt, continued their normal spending habits, saved for an emergency, or saved till after the pandemic. This could be inflationary but realistically 3200 dollars over two years is minor to an economy of our scale. Most economists have stated the stimulus checks kept the economy growing but not overheating. So this is not likely the biggest cause of inflation.
The next issue is the Fed’s expansionary policies bond-buying, and lowering rates. This is no doubt inflationary it allowed a hot economy that had been in its longest-ever expansion period to continue to grow at the handoff from Obama to Trump but then after the covid shutdowns. But when did it become an issue? The economy was growing, wages were rising, unemployment was continuing to hit record lows. The issue around inflation arose when demand outpaced supply. If we want businesses to continue to grow at low cost we need to keep rates and monetary policy expansive through the expansion.
So now to the uncomfortable part. Most economists believe (as do I) the supply chains can and will work themselves out. That being said we should not leave it to the free market. Biden has made some efforts to bring back domestic manufacturing capacity (including semiconductor funding), extend port hours, create a supply chain task force. Biden is doing all this and working with top CEOs to address and alleviate their supply chain issues. Bottlenecks will work themselves out but Biden should be more clear on what he is doing and how it is helping. Our economy pre-pandemic was producing more than demand. Shutting down and restarting the economy was going to have some issues temporary bottlenecks and inflations are better than job losses and a recession. The American public if told what we avoided will be patient. This will help show competence if he is honest, clear, and decisive on this issue. We can get through this, and create an economy that works for all. Inflation will decline capacity and supply once again outpaces demand, we need to focus on expanding supply not decreasing demand.