Who is responsible for inflation? It is complicated

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By Allison Morrow, CNN Business

President Joe Biden and other politicians will tell you that inflation is the fault of American businesses. Corporate America accuses the administration’s pandemic assistance programs of investing too much money in the economy.

The reality, economists say, is that it is all of these things. And more.

Regardless of which index of the top two inflation indicators you read, the Consumer Price Index or the Fed’s Preferred Personal Consumer Expenditure Price Index, the verdict is the same: inflation. peaked nearly four decades ago.

Of course, inflation in and of itself is not a bad thing. In the United States, for about 40 years, we have lived with a low and slow ideal inflation level that comes with a well-oiled consumer-driven economy, where prices are rising by about 2% per year. , if this. The current price hike reflects an economy that is returning to its fighting weight. What worries economists and policymakers is when prices continue to rise and when wages do not rise in kind.

While wages are also increasing overall, they have so far failed to keep pace with rising costs for food, energy, shelter and basic consumer goods. People are, of course, frustrated. While there isn’t a single culprit to blame, here are some of the Covid-19 forces, the greedy businesses, the supply chain crisis, the government you can rampage against.

The pandemic

It’s easy. The pandemic has changed everything in our lives, and when the world shut down in the spring of 2020, it was like cutting the global economy off.

But that summer, demand for consumer goods started to rebound. Highligths. Congress and President Biden passed a landmark $ 1.9 trillion stimulus bill in March that put money directly into Americans’ wallets. And rather than spending money on travel or dining out, we spent on stuff. A lot a lot.

Demand rose from zero to 100, but supplies could not rebound as easily. Factories were on lockdown or following Covid-19 restrictions, and raw materials were more difficult to obtain due to the sudden surge in demand. Shortages of just about everything have occurred, especially of workers to unload goods and get them to their destinations. We are still unraveling the mess in ports around the world.

Business america

It may seem morally satisfying and politically convenient to blame Corporate America. After all, profit margins are rising across all industries even as production costs have hit record highs.

About two-thirds of the largest publicly traded U.S. companies reported larger profit margins in the first nine months of 2021 compared to the same period in 2020, according to the Wall Street Journal. In other words, even as the costs of raw materials, labor and transportation have increased in response to the pandemic, many large companies are compensating for these costs by raising prices for consumers.

Analysts say it’s nearly impossible to verify the extent to which increases in consumer prices reflect rising costs of production versus a desire to make a profit, but companies aren’t exactly hiding their price changes. In fact, some even officially brag about their “pricing power” in corporate terms to charge customers a higher bill.

Democrats and consumer advocates are calling on these companies. Last month, Senator Elizabeth Warren slammed Hertz for spending $ 2 billion on a stock buyback, a common but controversial way of rewarding shareholders rather than investing its excess cash in rebuilding its fleet. , which could lower record prices for consumers.

While there is some truth in the argument that corporations make inflation worse, there is a larger structural problem underlying the problem: For decades, lax antitrust enforcement has put the spotlight on the issue. concentration of economic power in the hands of a few giants.

“Seen this way, the underlying problem is not inflation per se. It’s a lack of competition, ”wrote Robert Reich, a former US Secretary of Labor, in a recent editorial for the Guardian. “Businesses are using the excuse of inflation to raise prices and make bigger profits.”

The Biden administration

Republicans hammered Democrats and Biden’s White House on inflation.

After the November CPI stood at 6.8%, Senate Minority Leader Mitch McConnell wasted no time in pointing fingers. “It is unthinkable that Senate Democrats would try to respond to this inflation report by adopting yet another massive socialist spending program within days,” he tweeted.

It’s true that government spending spurs inflation, but economists have rebuffed the idea that Biden’s ambitious expansion of Biden’s social safety net would ignite price spikes. “Fears that the plan will trigger too high inflation and overheating the economy are overblown,” Mark Zandi, chief economist at Moody’s Analytics, said in July.

Moody’s analysts noted that government spending on items such as rental housing for low-income Americans, cutting prescription drug costs, and cutting child care costs is aimed at cooling prices and to alleviate shortages.

Republicans blaming inflation on Biden also conveniently overlook the trillions of dollars in spending in 2020 that was backed by Republicans and signed off by then-President Donald Trump, who economists say has also contributed to inflation.

The Fed

Money has been essentially free for the past two years, thanks to the Fed’s double-barrel approach to near-zero economic stimulus interest rates and massive investment in bonds that keeps yields close. from the lowest.

This stimulus avoided many financial and economic hardships and was always meant to be temporary. But for months, the Fed brushed aside inflation concerns, vaguely calling price spikes “transient” before the word became almost comically meaningless.

Now the Fed is finally pulling the brakes. The central bank announced last month that it would close its stimulus package faster than initially announced, and its updated economic projections show multiple interest rate hikes in 2022.

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