“This is not the inflation of the 1970s. Pandemic macroeconomics is a new macroeconomics. We are facing new and unprecedented challenges, and we cannot look to past data to get a sense of how to calibrate our choices,” said Tyler Cowen, an economist at George Mason University. “We are to some extent flying blind. … We should be genuinely uncertain here about what to do next.”
This inflationary burst has no single cause and no obvious solution. Trillions of dollars in federal aid approved by Congress in response to the pandemic have led American consumers and companies to purchase more goods than ever before, putting new strains on global supply chains to accommodate the soaring volume. But that higher demand has collided with shortages in workers, supplies and transportation capacity — challenges caused in part by the pandemic as well as long-standing structural deficiencies in the national economy.
After initially appearing limited to sectors particularly hit by the pandemic, higher prices have spread throughout most key sectors of the economy. Gas prices are at a seven-year high amid a global energy crisis, exacerbated by unusually high demand in Europe and a coal shortage in China. Food prices are rising at the highest level in 12 years amid severe droughts and spiking demand from families and restaurant reopenings. Meat, fish and egg prices are up nearly 12 percent from a year ago — the highest increase since 1979 (other than the early days of the pandemic) — partly fueled by processing plants’ struggle to find workers.
Economists do not believe all of these upward trends will last forever. The excess demand created by pandemic relief will dissipate. Global supply chains will settle down, as vaccines get distributed and the pandemic fades. But how long the price differentials will take to fade remains a mystery, and predictions that inflation would prove short-lived have thus far fared poorly.
The longer inflation lasts, the greater the political problem for the White House and congressional Democrats. Already, news of the October inflation spike spurred new head winds for President Biden’s signature and key legislative initiative — the roughly $2 trillion “Build Back Better” package — exacerbating fears that other moderate Democrats may echo the concerns raised by Sen. Joe Manchin III (D-W.Va.) this past week about more spending. Meanwhile, Republicans have sharpened their attacks over inflation, seeing it as among their best arguments against the Biden presidency.
Economists are particularly worried the inflation acceleration from September to October will continue, ultimately leading to sustained price increases and a shift in Americans’ expectations that become enormously challenging for policymakers to arrest.
“Nobody has a clear enough crystal ball to say if this will be the peak or is it going to keep accelerating,” said Matthew J. Slaughter, an economist at Dartmouth College. “You get to moderate levels of price inflation, and what can happen is more businesses and households adjust their expectations and price setting — and there’s no law of physics for how they take hold.”
Yet many economists say that the inflationary pressures hitting the U.S. economy were, in fact, necessary to avoid the far worse scenario of a prolonged downturn and that focusing on rising prices risks obscuring the healthy facets of the current rebound such as the rapid rebound in jobs.
Most families have more financial resources than they did before covid, especially among the bottom third. Even when accounting for inflation, disposable income has been roughly 9.5 percent higher in 2021 than it was before the coronavirus pandemic hit in 2019, according to Julia Coronado, president and founder of MacroPolicy Perspectives.
“It’s safe to say the bottom 40 percent of Americans are definitely better off in the past year from a combination of rising wages and government aid, even with inflation,” said Arindrajit Dube, economics professor at the University of Massachusetts at Amherst.
Biden and White House officials have emphasized these gains at every turn.
The U.S. economy is growing at a fast clip, especially compared with the rest of the world, and could recover the lost economic output from the pandemic by the end of next year, according to some projections. Workers at the bottom of the income distribution are seeing meaningful wage increases, even factoring in inflation. Job openings are plentiful. The stock market has continued its meteoric rise under Biden, with the S&P 500 jumping by more than 20 percent since he took office. Inflation is up globally, not just in the United States, and the supply chain dysfunction reflects a decades-long trend of companies scattering their production sources across the globe.
But the White House’s optimistic view of the economy — and initial downplaying of inflationary risk — has come under increasing strain amid economic data showing widespread concern across the country with rising prices. Many middle-class Americans say they are especially feeling it.
The approximately 50 percent rise in gasoline prices from last year — and 6 percent jump in October alone — has proved one of the most visible burdens on American families, spurred by a mixture of factors from Chinese manufacturing and an acute energy crisis in Europe.
Supply chain backlogs also show little sign of easing before early 2023, said Phil Levy, chief economist at freight company Flexport. While shipping rates from Shanghai to Los Angeles came down modestly from their September peaks and auto companies report slightly easier access to semiconductors now, a record 81 container ships were sitting off the Southern California coast on Tuesday, according to the Marine Exchange.
Food prices are also likely to remain uncomfortably high as demand spikes in China and a confluence of severe droughts, rising feed costs and escalating fertilizer prices keep crop and meat supplies expensive, according to Sara Menker, chief executive of Gro Intelligence. “One should not underestimate the amount of demand coming out of China alone,” Menker said. “We’ve just never seen this level of demand.”
Rent prices also jumped 0.4 percent from September to October, continuing an upward trend, while the sale price of a single-family home jumped by 16 percent over one year, according to the National Association of Realtors. A red-hot housing market has been spurred on in part by low interest rates and shortages in supply caused by a freeze in construction during the pandemic.
Americans are increasingly feeling the pressure. Consumer sentiment fell to a 10-year low in early November because of rising prices and the “growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation,” according to the University of Michigan’s preliminary sentiment index, released Friday.
“Before prices increased, I was still able to save a small amount of money and do some fun things for myself every now and then. Now? All my expenses are tied to make sure my basic needs are met,” said Weston Lucas, 32, a parking enforcer in the Dallas area earning $15 an hour who said he’s been affected by rising food, gas and rent prices.
Lucas eats the same $1.38 frozen meal for lunch every day — the most affordable option he can find — and often eats peanut butter sandwiches for dinner. “I feel like Biden is out of touch. I felt the same way about Trump. They have health care and pensions. They don’t have friends who are like me.”
With Republicans hammering the inflation issue at every turn, elevating it to the key reason to oppose the Biden administration’s remaining spending package in Congress, the president and congressional Democrats have started taking pains to acknowledge the harm rising prices create for American families.
In private briefings in late October and early November, pollsters working with the Democratic Senatorial Campaign Committee (DSCC) briefed Senate Democratic offices about the importance of shifting their messaging on the Build Back Better agenda to emphasize its impact on lowering costs, according to three people who were part of the briefings who spoke on the condition of anonymity to discuss the matter. In a two-page summary circulated to Senate Democratic offices and obtained by The Washington Post, the DSCC recommended that Democratic lawmakers “DO talk about the money we are saving Americans. DON’T talk about the bill in terms of a price tag.”
Inflation is a constant topic of conversation in many communities, and Americans, especially independents, do not believe Biden is doing enough to help the situation, said Richard Curtin, director of the University of Michigan Surveys of Consumers. The bottom third of Americans report much higher income than a year ago from rising pay and government assistance, but roughly a quarter of lower-income Americans and middle-class Americans say their living standards have declined because their incomes are not keeping up with inflation, according to Curtin.
“The polling is unambiguous. Nearly all Americans now report this to be a major concern,” said one outside White House economic adviser, speaking on the condition of anonymity to reflect internal deliberations. “It’s everywhere — every human, every demographic, every party.”
Complicating matters is that the White House has few obvious tools to immediately reverse inflation. Biden has touted the recently passed bipartisan infrastructure package as improving the nation’s supply chain, but funding for ports and waterways will take years to implement.
When it comes to building up the labor force, Treasury Secretary Janet L. Yellen has been candid in acknowledging the broad uncertainty around why record numbers of Americans keep quitting jobs or have fallen completely out of the workforce and do not appear to be coming back, citing lack of child care and ongoing concerns about the pandemic, among potential factors.
“I’m not sure why the participation rate has stayed depressed. I don’t think we have any clear evidence on that. I don’t know if it’s pandemic-related,” Yellen told The Post in a recent interview.
White House officials and congressional Democrats have emphasized that the Build Back Better plan could lure more people into the workforce by easing cost burdens and reducing family expenditures.
“It’s not about if you’re spending money at all that’s inflationary, but how you spend it. Investing in shoring up the supply chain — including in labor — could drive down inflation long term,” Rep. Alexandria Ocasio-Cortez (D-N.Y.) said in an interview.
What makes inflation so potent as an economic force is that the longer prices remain high, the more businesses and families shift their expectations for the future — and their actions for months or years to come. The psychological shift can prolong inflation and is difficult for policymakers to address.
For example, Utz Brands, which produces a variety of chips, pretzels and other snacks, told investors in recent days that it plans to raise prices again in early 2022 and would be ready for additional price hikes if supply costs don’t come down. U.S. Well Services, which works with the oil and gas industry, said Friday that the company implemented a 15 percent across-the-board wage increase for field employees that will be passed along as higher prices to clients. They’ll also require future business contracts to include clauses that “protect us against future labor cost inflation.”
Mark Cuban, the billionaire entrepreneur, said the pandemic has forced companies to shift their supply chains to reduce dependency on other producers, which “will be painful and inflationary” in the short term but ultimately benefit the U.S. economy.
“In the long run, it will make us much stronger as a country and economy as we see more automation allow companies to produce products here in the states, which in turn will enable production here to be more globally competitive and push pricing, if not lower, then back to the low inflation we have seen the last few years,” Cuban said in an email.
But other experts fear more dramatic federal interventions may prove necessary. If price increases continue, the Federal Reserve may raise interest rates, which would not only slow the pace of inflation, but also the pace of job and economic growth. That would follow the pattern after the inflationary scares of the 1970s, when policymakers focused on ensuring a regime of relatively stable prices by keeping growth from ever running too hot.
Such choices come with dramatic costs. As a result of its attempts to clamp down on rising inflation, the United States went through a sustained period with a “huge loss” in economic output, employment and income, said Douglas Elmendorf, who served as director of the nonpartisan Congressional Budget Office. “We certainly don’t want to live through that again.”
“Every month inflation remains high, the risk we build an inflationary spiral goes up. And if we end up in an inflationary spiral, bringing it down will require a bigger correction,” Elmendorf said.