This might seem strange, since unemployment remains above 6 percent, with more than 8 million fewer jobs in the United States than there were before the pandemic. Inflation, however, is a monetary phenomenon, not an employment-based one. The fact is that the economy is awash in money thanks to the trillions of dollars in pandemic-related relief in the past year.
U.S. personal income hit a record high in March, fueled by the latest round of covid-19 relief checks. Income was up a whopping 21.1 percent, the largest increase on record. This has fueled higher levels of consumer spending, too, despite the continued controls on much of the service sector. U.S. consumers spent $15.4 trillion in March, more than $500 billion more than in February 2020, the last pre-pandemic month. Despite this record spending, the personal savings rate still hit 27.6 percent, a rate surpassed only by that of last April, when Americans received their first round of stimulus checks. They are spending more than ever and are still sitting on trillions of dollars in saved government relief checks.
That money has to go somewhere, and it can’t all be spent on vacations and trips to newly reopened restaurants and movie theaters. A lot of it will go to higher prices for things people want to buy now — in other words, inflation. This is true even before the rest of President Biden’s $1.9 trillion relief plan is spent in the coming months. And that doesn’t begin to consider the potential inflationary effects of Biden’s proposed additional $4 trillion in spending.
Treasury Secretary Janet Yellen seems to realize this. She came under fire this week when she said the Federal Reserve could easily control inflationary outbreaks with interest rate hikes, a statement that reassured financial markets but ran counter to the administration’s official policy of denying inflation was likely to ensue in any event. She tried to walk back those comments later in the day, but it appears she simply committed the sin most frowned upon in official Washington, D.C.: telling the truth.
Much rides on how high inflation gets. The administration will likely spin official statistics to play down bad news. There are many competing inflation indexes, and the ones economists prefer — the personal consumption expenditures (PCE) price index — tends to show lower levels of inflation than the consumer price index (CPI), which is the more commonly used figure by the media. Both indexes also have a separate “core” index that strips out food and energy. This can reduce reported inflation even further, as prices tend to increase more rapidly in these categories. Expect administration officials to tout whichever index shows the lowest inflation.
Even the CPI, however, doesn’t account for some price hikes. The CPI treats the purchase of homes as an investment, not consumption. It tries to estimate what homeowners would pay for their houses if they rented them, which is clearly something few people in the real world think about. People in the market to buy a house see skyrocketing prices; they will experience that inflation even if the government doesn’t acknowledge it. Americans bought a total of 6 million homes in 2019, a number expected to increase this year. Voters who just went through bidding wars are not likely to believe inflation isn’t real.
Americans have to be in their late 50s to have lived as an adult through double-digit inflation; the CPI hasn’t been above 4 percent consistently since the late 1980s. This generation looks like it’s going to have its own rendezvous with inflation destiny soon. It won’t relish the experience.