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The United States is in the midst of the biggest spike in inflation in decades, according to data released by the Department of Labor last week. Prices for everything including food, gasoline, housing, cars and a long list of other consumer goods rose 6.2 percent between October 2020 and October 2021, the biggest one-year jump since 1990.
Inflation is a measure of how quickly the cost of goods and services increases over time. A steady rate of inflation is normal, even desirable. But when prices rise too quickly, it can mean basic necessities suddenly become more difficult to afford, especially for poorer Americans who spend a larger portion of their income on food, gas and rent.
Concerns about runaway inflation often draw from the experience of the 1970s, when prices snowballed for several years until the Federal Reserve cranked up interest rates to get things under control. That move did eventually reduce inflation, but it also plunged the country into a recession.
Economists like to say that inflation is the result of “too much money chasing too few goods.” The pandemic disrupted both sides of that formula. While the virus and resulting economic collapse have been devastating for some, many Americans actually have more money on hand thanks to a period of reduced spending, massive economic rescue packages and super-low interest rates. At the same time, the supply of goods has been choked by overwhelming demand, supply chain bottlenecks and shortages of specific components like semiconductors used to make cars.
Why there’s debate
There has been an ongoing debate among economists and policymakers about how big a problem the spike in inflation really is and whether any steps need to be taken to correct it.
For months, it’s been the position of the Biden administration that the problem will mostly resolve itself once life returns to a relative normal. “I think continuing to make progress against the pandemic is the most important thing we can do,” Treasury Secretary Janet Yellen said Sunday. Overreacting to inflation, many say, could stifle the economy’s recovery. President Biden has also argued that his legislative agenda — which includes an already-passed infrastructure bill and his Build Back Better social spending plan — will help alleviate some of the supply issues that are feeding inflation.
Those who are most concerned about inflation continuing in the long term, a group that includes many conservatives, say aggressive action is needed to reduce the amount of money in the economy before prices spiral out of control. Many have called for the Federal Reserve to raise interest rates and cut back its purchases of bonds — or, at minimum, signal that it’s willing to do so to calm fears about inflation. Others say inflationary concerns are reason enough for Biden and the Democrats to abandon their efforts to pass any more spending bills.
Federal Reserve Chairman Jerome Powell said recently that he won’t have a clear view of the state of inflation until the pandemic and its economic impacts recede even further. He also said unemployment is currently too high to consider a hike in interest rates anytime soon.
It’s worth slowing down the recovery to keep inflation under control
“Yes, it’s true that, no matter what the Fed does, it will almost certainly be criticized. It’s in a trap of its own making. If it eases credit, it might invite inflation. If it tightens credit, it might flirt with recession. All this might temporarily lower the rate of economic growth, but the benefits of relatively stable prices lie mostly in the long term — and they transcend economics.” — Robert Samuelson, Washington Post
Inflation is a positive sign that the economy is recovering from the pandemic crash
“I know it doesn’t feel like it, but inflation is both a feature and a bug of a normalizing economy.” — Vitaliy Katsenelson, MarketWatch
Interest rates need to be raised
“The Fed must acknowledge that its monetary policy has been a source of inflation, and that it will need to raise interest rates more quickly than it presumed.” — Mickey D. Levy, Wall Street Journal
Any policy changes to address inflation should be subtle and gradual
“First, the economy does not need any more fiscal or monetary stimulus. … The Fed, likewise, should tighten monetary policy step by step, with interest rates rising from today's rock-bottom levels (0.05% on 3-month treasury bills) to more historically normal levels in the next few years.” — Jeffrey Sachs, CNN
Lawmakers can’t pretend that inflation isn’t a real issue that needs fixing
“What is not going to work, and hasn’t worked, is trying to talk people out of the lived reality of higher prices.” — Rich Lowry, Politico
Democrats’ policy proposals will only make the problem more severe
“Now is not the time to take inflationary risks. Now is not the time to experiment with green-energy policies, which will drive up prices. Now is not the time to do a federal takeover of childcare, which will drive up prices. The United States has bountiful natural, industrial, and human resources. To fully mobilize them in response to the present inflationary pressures, government needs to step aside, not insert itself into more places.” — Editorial, National Review
Inflation is no reason to cut back on Biden’s agenda
“An inflation spurt is no reason to cancel long-term investment plans. ... The Biden administration’s spending proposals ... would do little to boost short-term demand and would help long-term supply.” — Paul Krugman, New York Times
Supply chain problems will sort themselves out
“The supply chain logjams are the core of the problem right now, and that should work itself out over time. To the extent we’re more enlightened about inflation than we were in the 1970's after decades of experience and study, we can also thank some good fortune in that the private sector is able to unclog supply bottlenecks piece by piece to stem inflation, rather than just nuking the economy with higher interest rates.” — Conor Sen, Bloomberg
The worst thing to do would be to overstate the risks of inflation
“When people see inflation as a force that’s disconnected from the underlying economy, their inflation expectations are likely to rise. And when inflation expectations rise, actual inflation tends to follow — if a business owner thinks prices are going to jump 5 percent next year, they’re going to hike prices 5 percent in anticipation. That kind of thinking sets off the kind of the vicious cycle we want to avoid.” — James Surowiecki, MSNBC
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Photo illustration: Yahoo News; photos: Getty Images