The Washington PostDemocracy Dies in Darkness

Opinion The risk of inflation is real — and growing

Blank checks on an idle press at the Philadelphia Regional Financial Center. (Matt Rourke/AP)
Placeholder while article actions load

President Biden hopes his $1.9 trillion stimulus act has Americans repeating a word they’ve longed to speak for more than a year: recovery. It could also have them saying one they haven’t said in a long time: inflation.

Inflation is normally a result of too much money chasing too few goods. That’s not to say that price increases cannot result from other causes. Rising energy prices, for example, are often the result of sudden changes in supply, as happened when the Arab oil embargo began in 1973. That’s one reason central banks often look at what they call “core inflation,” which strips out price levels for volatile sectors such as food and energy to assess whether an economy is suffering from sustained inflation. In general, increases in prices across the wide basket of consumer goods are the result of dramatic and continued increases in the supply of money.

That’s exactly what happened in the past year. The succession of government stimulus packages to combat the covid-19 pandemic has increased the broad supply of money in the United States from $15.5 trillion in February 2020 to a whopping $19.4 trillion in January. That is a record one-year increase, according to statistics from the Federal Reserve Bank of St. Louis. Biden’s billions will come on top of that.

This has not caused inflation so far because people have largely saved the money rather than spent it. The personal savings rate — the percentage of income that people save rather than spend — has skyrocketed during the pandemic, up from a pre-pandemic average of around 7 percent to as high as 34 percent last April. The savings rates for almost every month over the past year have exceeded that of virtually every month in the past 60 years, as people socked away their wages and the government’s previous stimulus checks. That means most Americans will already be sitting on oodles of cash when Biden’s new $1,400-per-adult checks hit their bank accounts.

Follow Henry Olsen's opinionsFollow

What Americans decide to do with this money will determine whether we experience a burst of inflation in the coming months. Some of the money will clearly be spent on buying things the pandemic has artificially suppressed, such as vacations and dining out. That will go to expanding economic activity rather than automatically increasing prices. But people who are flush with cash are also less likely to closely consider costs. A pandemic-weary population may be even less inclined to shop for bargains than normal. If that happens, prices could easily soar as consumer confidence returns.

That’s what’s already happening with housing prices and gasoline. Zillow estimates that housing prices increased 10 percent last year and expects them to go up another 11 percent this year. That could be a low estimate, as the rate of increase last year spiked a couple of months after the first stimulus checks arrived. The price for a gallon of gasoline is also rising fast, up by more than 10 percent in just the past month and more than 30 percent from a year ago. Prices will likely continue to increase as more people start to drive to work and go on summer vacations. Demand increases could far outpace the ability of oil producers or house builders to increase supply, and the people demanding more gas have money to burn. That’s the classic recipe for inflation.

The money supply has risen dramatically elsewhere, too. The European Union’s stimulus measures have hiked its money supply from roughly 12.8 trillion euros at the beginning of the pandemic to 13.8 trillion today. Britain’s money supply is up, too, from 2.5 trillion pounds to more than 2.8 trillion. Global consumers are sitting on the same piles of cash as U.S. consumers, with many facing even greater restrictions on their ability to spend it. Once they are vaccinated later this year, the temptation to go on a spending spree will be enormous.

The world should look to Israel to see what the future might hold. That tiny nation has experienced three separate national lockdowns while increasing its money supply by more than 20 percent during the pandemic. Israel is also the world leader in vaccination, with nearly 60 percent of the population already receiving at least one shot. Israeli unemployment is much higher than elsewhere, standing at 19.5 percent last month, so putting people back to work will be the first effect of economic reopening. If prices start to jump rapidly once the economy is back on its feet, however, that would be a sign that the United States could suffer a similar fate later this year.

Rapid inflation is always a political millstone for those in power. Biden and the Democrats are riding high now. If inflation comes roaring back, they won’t be there for long.

Sign up to receive my columns in your inbox as soon as they’re published.

Read more:

Henry Olsen: Biden has finally agreed to slim down stimulus checks. There’s a lot more he could cut.

Charles Lane: China made it easier for the Fed to fight inflation, but those days are gone

Catherine Rampell: Republicans are laying a ‘Trojan horse’ trap on infrastructure

George F. Will: The Fed has an irresistible equity itch

Greg Sargent: How Biden and Democrats are destroying one of Trumpism’s biggest lies