Why is inflation happening? Economists point fingers at different culprits

Although the pandemic has impacted the economy, the primary driver of inflation is still unknown.

Why is inflation happening? Economists point fingers at different culprits

Americans continue to hear and experience the country's inflation woes. They can see it clearly in their gas prices and grocery prices as well as on their news feeds.

The inflation rate has surpassed the 40-year high set in December. However, many are still unsure what is causing this inflation and when it will end. While it is obvious that the pandemic has impacted the economy, the question of what is causing the dollar's purchasing power to plummet remains unanswered.


This is not a problem for the average person. Although economists generally agree that inflation is caused by the same factors, they differ on which elements are driving the continued price rises that continue to be a problem for American consumers.

Surging demand, rising production costs and wide swathes of relief funds all play a part, they claim. But politics can cause one to point fingers at the supply chain, or the $1.9 trillion American Rescue Plan Act 2021, as the main culprits.

An apolitical perspective may suggest that everyone has a role in reducing the distance that a dollar can travel.

David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at Brookings Institution, stated that "There's an a combination of factors -- it is both." Inflation is a result of a combination of many factors that have pushed up demand, and some that have kept supply from responding appropriately.

He stated that it was inarguable the surge in demand in a pandemic country was due to very aggressive fiscal-monetary policies as a response to Covid-19. The Obama administration's stimulus package for 2008 recession was $787 million. The Trump and Biden pandemic stimulus packages total around $5 trillion.

Although the huge amount of money has helped to boost demand, it is still a problem in the supply chain. Wessel stated that 20/20 is the best kind of hindsight, but he believes that the policy was essential for a full recovery.

Dean Baker, co-founder of the left-leaning Center for Economic and Policy Research agrees. This aid was essential to ensure a smooth recovery in the country.

He said that while the stimulus had had a positive impact on the economy, the pandemic caused people to purchase products and not services. The country's supply chain was still in crisis, so people bought couches, refrigerators, and other items. This drove up demand.

He said that he considered it secondary, but there was no doubt that it played a role in driving inflation.

The act still has $300 billion that is destined for states. Experts claim that the Biden administration overheated and ignored signs that the economy was recovering.

"Fiscal Policy has been extraordinarily aggressive," stated Brian Riedl, a Senior Fellow at the Manhattan Institute and former chief economist for Sen. Rob Portman (Republican from Ohio).

However, the Biden administration insists that the American Rescue Plan Act is not responsible for inflation. It points out that the American Rescue Plan Act has not driven inflation.

The White House also pointed out the inflationary difficulties faced by other countries. It argued that this is not a matter of policy, but rather a difficult period caused by the pandemic many nations are currently facing.

Jen Psaki, White House Press Secretary, stated that price increases in Europe and the United States have been basically neck-and-neck over the past six months. This was when January's inflation numbers were published. "In December, E.U. It recorded the highest ever recorded inflation. In December, Germany experienced its highest recorded inflation since reunification. While there are differences between countries, this global phenomenon is driven by global issues.

It is incontrovertible that this period of inflation is torturing White House's political ambitions.

The Biden administration lost the battle for Build back Better to Senator Joe Manchin, D.W.Va. It has been trying to get pieces of the policy package, which consists of approximately $2 trillion in spending and tax cuts, through.

It seems that February's inflation numbers at 7.5 percent have altered the conversation, especially after Manchin -- who was a pivotal vote to pass any Democratic package in the Senate -- stated that so-called "inflation tax" were "draining every American's hard-earned income."

After the latest inflation numbers were published, Manchin stated that "it's beyond time for Congress to address this issue head-on. Congress and the Administration must proceed with caution before adding fuel to an already on fire economy." "As inflation continues to rise, and our $30 trillion national debt continues to mount, people in Washington, D.C. seem to believe that spending trillions of taxpayers' dollars will solve our problems, let alone inflating inflation."

Many argue that corporations could play a greater role in lowering prices and helping employees to meet these prices without increasing prices.

Baker and other economists are most concerned about a wage-price cycle. This is when workers demand higher wages in order to pay for rising costs. Businesses then raise their consumer prices to match these costs.

Baker claimed he isn't demonizing corporations but it is evident that they have made huge profits in the past two years.

He stated that the data clearly shows that profits have been shifting in recent years. "What's happening is that companies are responding to shortages by raising prices and that's disproportionately going towards their profits. I believe that they have the ability to pay higher wages and not see their profits shrink.

In the meantime, the Federal Reserve has indicated its intention to increase interest rates to combat inflation. This would likely reduce consumer spending on large-ticket purchases, and help to cool down the economy.

Riedl stated that merely stating the central bank's intention will help. However, it remains to be seen how much the central bank will increase interest rates.

He said, "They need to take care because we're still quite weak coming out of a recess and the economy could pretty easily go backwards."

"Additionally raising interest rates won't fix the supply chains. We won't be able solve inflation until we have that problem resolved.


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