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If you’ve had to scour the market for a cheap car or a new rental lately, you may have noticed: it’s getting more expensive. Since June 2020, when the pandemic-induced recession was officially declared, the consumer price index – a metric that tracks the cost of a fixed shopping cart – has risen 5.4 percent, its biggest jump in 13 years, according to data published here Weekly.
The news has raised warnings of “an inflationary disaster like the 1970s”. Should Americans be concerned about their economic wealth or is this an acceleration on the road to a full recovery? And how will inflation concerns affect the fate of President Biden’s infrastructure and climate protection plan? Here is what people are saying.
Why everyone is talking about inflation
For most Americans, the main risk of inflation being too high is that wages will not keep pace with rising prices for goods and services, and their paychecks will effectively shrink. But if workers bargain for higher wages to cover their living costs, the theory goes that employers will pass the higher labor costs on to consumers, plunging the economy into a ruinous spiral of inflation.
How to tell when inflation is getting out of hand is much discussed in business. “Since the 1970s, and particularly since a seminal paper by Robert Gordon in 1975, many economists have tried to distinguish between transient fluctuations in the rate of inflation, driven by temporary factors, and an underlying ‘core’ rate of inflation that is much is more stable – but also hard to lower when it gets uncomfortably high, ”writes Times columnist Paul Krugman. “The idea is that policy should largely ignore temporary inflation, which should be easy to come, easy to go, and only worry when core inflation looks like it’s getting too high (or too low).”
The big picture: Since the Great Recession, inflation has been even lower than the Federal Reserve wants, a sign of stagnant wages and less than full employment. But the debate has turned today, acting as a proxy war of sorts over the wisdom of the pandemic relief packages that Congress passed since last year. Some economists argue that the US $ 1.9 trillion bailout plan from March put too much money in workers’ wallets just as wealthy households were preparing to spend the huge savings they accumulated from the pandemic had. And when the economy cannot produce enough goods to meet demand, prices rise.
A closer look at the numbers
The single largest driver of inflation reported in June, which accounts for more than a third of the rise, is the used car market. “The rise and rise in car prices was one of the dominant inflation narratives of 2021,” explains Felix Salmon at Axios. “It was caused by a shortage of new cars, which in turn was caused by a lack of the computer chips required to run a modern car.”
Used cars aren’t the only part of the story, however. The prices of gasoline, plane tickets, hotel rooms and washing machines are also rising as consumers spend their savings and travel expenses rise again. Rents are also rising.
The cause for concern
Perhaps the loudest warning about the inflation risks of Biden’s economic agenda was Larry Summers, who served as chief economic advisor to President Barack Obama during the Great Recession. In February, a month before Congress passed the US bailout, Summers wrote in the Washington Post that this level of stimulus “risks creating inflationary pressures unlike anything we have seen in a generation.”
According to reports, some White House officials believe the new data confirms Summers’ predictions. Desmond Lachman, a senior fellow at the American Enterprise Institute, agrees.
“The main risk that higher inflation continues to go hand in hand with high unemployment is that the delta variant could spread quickly both domestically and internationally,” he writes in The Hill. “If the delta variant prevails abroad, it could prevent the current global supply chain interruptions from being resolved. In particular, it could keep both food and industrial materials scarce and exacerbate the current electronic chip manufacturing shortage that is so important to modern manufacturing production. “
One of the greatest and most acute threats to many Americans is the rise in rents. Small and medium-sized cities in particular have seen an influx of wealthy tenants from coastal areas, but housing construction has not kept pace, leading in some cases to bidding wars.
“Landlords in many of these inland cities are suddenly realizing the power they have,” Heather Long reports for the Washington Post. “As prices rise in smaller towns, particularly in the Inland West and the Sun Belt, economists and real estate agents are warning that there will be unforeseen consequences and it could be years before enough homes are built in these areas to ease price pressures . “
The case to keep calm and move on
Policy makers like Jerome Powell, chairman of the Federal Reserve, and investors are still pretty confident about the long-term inflation outlook, report The Times’ Jeanna Smialek and Jim Tankersley. Why? There are several reasons.
The percentage change can be misleading: Last year’s recession caused prices to drop for about three months, so at least part of the increase can be attributed to the return of the economy to a prepandemic basis. “Profits should be wearing off soon for a simple reason,” say Smialek and Tankersley. “The price index looked artificially high this year, measured against very weak values from last year.”
The increases are concentrated and may be temporary: As Eric Levitz notes in New York Magazine, the data tells a very different story if one omits the goods that are subject to the most volatile price fluctuations – a measure that the Federal Reserve says “can provide a better signal of underlying inflationary trends.” Bank of Cleveland. “According to this metric,” writes Levitz, “the underlying inflation trend in the US is actually negative.” It is expected that even outliers such as used cars will eventually fall in price again – similar to what was recently the case with lumber – if kinks in the supply chain.
The unemployment rate is still much higher than it was before the pandemic: There are around 6.8 million jobs fewer than in February 2020, suggesting that the economy still has a long way to go before it reaches its full potential. “Many economists argue that current increases should flatten out as auto supply picks up, consumer spending returns to more normal patterns, and companies resume and expand capacity,” write Smialek and Tankersley.
How will this affect the infrastructure debate?
Republicans have cited inflation as evidence of the Biden government’s economic mismanagement and the need to oppose the Democrats’ new proposal in Congress to invest $ 3.5 trillion in infrastructure and climate protection.
But even inflation hawks like Summers argue with this logic, since infrastructure investments could produce the very same economic productivity gains that would dampen supply-side inflation. Conversely, Levitz writes, “an increase in interest rates will not generate more microchips, but it would slow employment growth while the unemployment rate in America is close to 6 percent.” It is a point Powell seemed to sympathize with than the MPs Alexandria Ocasio-Cortez raised it in a House of Representatives hearing for financial services on Wednesday.
For this reason, “Congress should focus particularly on supply-side effects when debating its next major draft spending,” argues Karl Smith in Bloomberg. “It is clear that neither the supply of labor nor the goods they produce are rising fast enough to calm fears of inflation.”
In the Times, Mike Konczal and JW Mason outline some ideas how Congress can help cope with the inflationary pressures that further federal spending could create. For example, removing barriers to new housing could prevent rents from spiraling out of control, while increasing childcare benefits and other family-friendly measures could increase labor supply by making parenting and work more compatible.
“Inflation can be a real problem – if not now, then maybe soon,” they write. “But it’s a challenge that can be met, not a terrifying monster to avoid at all costs.”
Do you have a point of view that we overlooked? Email us at [email protected]. Please include your name, age and place of residence in your reply, which may be included in the next newsletter.
CONTINUE READING
“It is time to think about evasive measures against inflation” [Bloomberg]
“The story is still (mostly) about the reopening and the supply of motor vehicles” [The Overshoot]
“Will President Biden’s economic stimulus cause inflation? Economists are unsure ” [London School of Economics]
“Inflation? Not in Japan. And that could be a warning for the US” [The New York Times]
“What if inflation is not ‘temporary’?” [The New York Times]
WHAT YOU SAY
This is what readers had to say about the last debate: The panic over critical racial theory
Thomas Willard, Professor Emeritus of English at the University of Arizona: “The need for a national curriculum in the USA has never been so clear. The country can never achieve the ideals enshrined in the constitution – ideals that conservative voices want rather than critically questioning where and to what extent those ideals have been upheld – as long as students and teachers are limited to what elected politicians want them to learn (or heard not mentioned). Most of the other G20 countries have national curricula. They also tend to do better in school-leaving exams and in combating income inequality. “
Caleb, Texas: “While I thoroughly enjoyed reading the current state of public debate about the appropriate role of racial theory in society, I believe your article left out a remarkable segment of critical racial theory – the school of afropessimism . … It is a theory that opposes typical compromise means, such as the commitment to other forms of resistance to inequality, and rejects half-measures such as “diversity training” or “privilege control”. Because of the pessimism that drives the ideas behind the theory, it loses much of its audience in its negativity to eradicate the structures that lead to violence against blacks. “
Felicia Nimue Ackerman, Professor of Philosophy at Brown University:
“Measures that restrict your enemy’s speech
Can be a temptation, it’s true.
But better beware of their growing reach
Soon they will cancel you. “