Inflation and Who’s to Blame?

As a conservative, particularly fiscally, and a student of economics for more decades than I’d like to count, witnessing the economic mistakes made by our federal government over the last 20 years, and the hardships they have wrought upon us, has been downright painful.  Given the surge in inflation the last few months and our tendency to want to blame somebody, perhaps it would be helpful to take a step back and consider what caused the recent spike before locking onto who’s to blame. 

As most of us are aware, the annual rate of inflation spiked to 7.5% in January, the highest since 1982.  All evidence points to seven factors that have contributed to this surge: one of the biggest economic upheavals and turnarounds in our country’s history, labor and supply shortages, rising oil prices, price gouging, and two forms of pandemic related stimulus.

First and foremost among the causes of this inflation spike was the magnitude of the economic downturn and turnaround.  When such a large downturn and rebound occurs, economists often liken it to what happens when a python swallows a pig.  Another visual portrayal is what has happens when some large guy does a “cannon-ball” jump into a pool. The initial waves, and the waves that bounce back off the walls of the pool, are often significant and take a while to settle down.

Tragically, the magnitude and longevity of the 2020 pandemic created a parallel economic depression in supply and demand, setting the stage for the tremendous economic rebound in 2021.  That rebound, coupled with shortages of supplies and labor have been the primary drivers of inflation.  A painful reality that many may be inclined to dismiss is that had medically recommended steps been followed to mitigate the pandemic in 2020, the depth of both the pandemic and the inflationary economic rebound would not have been so sizable.

Layered on top of this year’s tremendous economic rebound has been a severe labor shortage. The pandemic caused over 225,000 deaths among working age individuals, millions of parents needed to stay home with children or ill family members, and a record number of people chose to avoid risk of being infected and retired.  In 2020, the pace of baby boomer retirements accelerated, jumping to 3.2 million more than in 2019.  Severe limitations placed on immigration during the Trump presidency also reduced the availability for labor by cutting the number of legal immigrants available today by roughly two million workers.

Oil prices, which not only show up in the price we pay at the pump, but feed into the cost of almost everything, rose by over 50 % in the last 12 months.  While we’d all like to blame somebody, the reality is that oil is global commodity, which not even our President can meaningfully affect. 

On top of all of the above, under the fog of our emergence from the pandemic, some businesses chose to raise prices beyond covering cost increases. Just as some are inclined to take advantage of opportunities to steal during the “fog of war”, during the turmoil of our recovery some executives, recognizing our eagerness to resume our lives, chose to bump up price increases to boost profits and bonuses to record levels.   

While the Biden Administration’s $1.9 trillion American Recovery Act also played a role in stimulating the economy and added to inflationary pressures, I submit that spending was essential to supporting our economy, communities and families in crisis.  Yes, some extended unemployment, child tax credits and stimulus checks went to some people that didn’t need them, but Biden had to act fast and boldly to rescue our economy and tens of millions of families from severe economic hardship.

More significant than Biden’s fiscal stimulus were the actions undertaken by a far more obscure federal agency, the Federal Reserve.  In 2020-21 the Fed pumped $4.7 trillion into the economy with the goal of averting an even more severe economic downturn.  Unfortunately, the Fed failed to stop printing money in a timely way, significantly adding to inflationary pressures.  Last summer, and particularly last September, when unemployment dropped significantly and inflation rose significantly, the Fed continued to pump $120 billion per month into an economy already supply and labor constrained.

So, who’s to blame for this mess? While some might be inclined to blame President Biden, all evidence demonstrates there’s a lot of blame to go around.  And, if the last few years has taught us anything, I hope it’s that quickly laying blame where it doesn’t belong and lunging for the promises of opportunistic politicians, can lead us into an even deeper hole.