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Getting Ahead: Inflation-what causes it?

Posted Jun 14, 2023 9:06 AM
By Patricia Jones, Alliance Community Task Force: Creating Opportunity

One of the most challenging problems facing Americans today is inflation. It’s not like the inflation of the 70s and early 80s, but prices are rising faster than they have in decades. What is causing inflation, and why haven’t we been able to beat it?

We all remember the crises created by COVID – not just the health issues, but the economic problems as well. We went into lockdown. Businesses closed. Schools closed. Government offices closed. Millions of people were laid off from their jobs.

Our federal government responded with the CARES Act. The U.S. Congress and President Trump passed a $2 trillion stimulus bill called the Coronavirus Aid, Relief, and Economic Security Act (CARES) in March 2020 to lessen the economic damage set in motion by the global coronavirus pandemic. The package included direct benefits to furloughed workers, families with children, small businesses, independent contractors and gig workers, large corporations, and the health care system. One year later an additional $1.9 trillion was approved by the new Congress and President Biden, called the American Rescue Plan. Its goal was also to promote economic recovery and avoid a recession. Federal and state governments have cut taxes. All this means we have more money flowing in our economy.

One of the terms we started hearing from economists in 2020 was “supply-chain issues.” We couldn’t get the products we needed for a variety of reasons. Most supply-chain issues centered on transportation: ships couldn’t deliver raw materials or completed products, ports were closed, factories were shut down due to COVID outbreaks. Because different nations specialized in producing specific types of parts or goods, the manufacturing sector of the economy struggled; in some areas it is still struggling. For example, the loss of silicon chips produced in China meant cars couldn’t be manufactured in the U.S.

We’ve seen some major changes in the labor market. The Bureau of Labor Statistics says that in June, 2020, 18.1 million people were unemployed; 11.4 million (63 percent) were unable to work because their employer closed or lost business due to the pandemic. Millions more worked from home. Many people took early retirement or dropped out of the labor force for other reasons. Now we have record low unemployment rates, labor shortages, and wage increases.

The Russia-Ukraine war meant the disruption of global markets. This was especially true for farm products from Ukraine, the breadbasket of Europe, and the distribution of oil from Russia. Those products were sanctioned, embargoed, or blockaded in order to put pressure on one nation or the other.

Because of the influx of government money, supply-chain issues, labor shortages, and the Russia-Ukraine War, we have continued to deal with a major economic problem – inflation.

The standard, macroeconomic way to deal with inflation is for the Federal Reserve to raise interest rates and for the government to reduce spending. This reduces demand by making it harder to buy things, meaning people spend less.

A group of economists is now arguing that this current inflation is primarily seller’s inflation. A small number of firms in major industries have market power, which means they have the ability to hike prices and their competitors will do the same.

Businesses have, of course, dealt with rising costs, just like the rest of us. Therefore, they’ve had to raise prices. Their customers have willingly paid those prices, so why would those prices drop when costs go down? Corporate profits are way up, and so is the stock market. The wealthy have seen their riches skyrocket, with some Americans being worth hundreds of billions of dollars.

Clearly not everyone has been hurt by inflation.