It has been a generation since Americans had to worry about inflation. Leaders across Washington must not underestimate the havoc unrestrained price rises could wreak.
These numbers do not represent some abstract macroeconomic variable; one of the results of the price hikes is that Americans’ real wages are declining. Accounting for inflation, average hourly wages fell 1.2 percent from a year ago.
Forecasters at the Federal Reserve and elsewhere had projected much tamer inflation after spikes earlier this year. Now the best spin the White House’s Council of Economic Advisers can put on these persistently high numbers is that the average increase over the past three months is slightly lower than it was three months before that.
Part of the reason forecasts were off is the unexpected rise of the covid-19 delta variant. There was always going to be an adjustment period as the economy began reopening. The pandemic scrambled supply chains, cutting the availability of products such as the microchips that go into cars. While hiring and economic recovery proceed, delta is making it even harder for supply chains to keep up. There is another possible factor: stimulus from the American Rescue Plan, the debt-financed coronavirus aid bill that Congress passed in March, which sent most people $1,400 checks and pumped up other federal payments to Americans.
Experts have argued that these kinks will work themselves out of the system relatively quickly. But there is a danger that people’s expectations will change in the meantime. Workers seeing their wages decline in value may buy goods as soon as they can, stoking higher demand that surpasses the economy’s ability to keep up, leading to yet higher prices.
Responsibility lies first with the Fed to project a message of both concern and stability. The central bank in the recent past had reoriented its policy toward promoting full employment rather than fighting inflation. Though the Fed has begun tapering the stimulative “quantitative easing” program it introduced during the covid-19 downturn, at its current pace it would not end the program until June, with possible interest rate hikes to follow. Making clear that the bank could take stronger measures if high inflation persists would in itself depress inflationary expectations.
President Biden could help by renominating Fed Chair Jerome H. Powell, clearing up questions about who will lead the central bank next year. Congress should also avoid doing anything to encourage inflationary fears. Democrats working on their Build Back Better spending bill should ensure that the bill is genuinely paid for — and not just with speculative estimates about how much more tax revenue could be brought in by adding capacity to the Internal Revenue Service.
Managing the post-pandemic economy is looking even more challenging than it seemed it would be just a few months ago. Policymakers must keep inflationary expectations moored without overreacting and arresting a still-recovering economy.