As time goes by, it becomes ever clearer why we suffered our recent bout of inflation. It's pretty straightforward:
- The pandemic caused supply to decline.
- The CARES Act, passed immediately after the pandemic started, kept demand high.
That's it. If supply goes down and demand goes up, you get inflation. When supply recovers, inflation goes down. This explains about 90% of what happened.
Here's a more detailed look at what happened. First, supply chains got snarled. After a brief recovery, they remained snarled all the way through the end of 2021:
Industrial production declined. By the end of 2020 it was 6% below its pre-pandemic level, and even by the end of 2021 it was still down 2%:
But consumer demand remained strong. By the end of 2020 nominal spending was 8% higher than its pre-pandemic level:
The result was exactly the kind of inflation you'd expect:
Inflation in goods, especially in durable goods that were in short supply, began to rise almost immediately and was already nearing 5% by the end of 2020. Conversely, inflation in services, which depends more on wages than on shortages, took longer to appear because wage increases generally follow price increases.
Is there more to the story? A little bit. Housing inflation appeared late and was affected by interest rate hikes. The Ukraine war raised oil prices for a while. Ukraine and some other factors affected food prices. The Biden stimulus kept demand high. But none of these things were the source of inflation. At most they extended it a bit.
So that's it: Inflation = Pandemic + CARES Act. Those two things started it, and when they faded out they ended it. Neither Joe Biden nor the Fed played more than a minor role.
And if we can follow the implications of this very straightforward argument just a little further, consider what it meant for PEOPLE'S LIVES. Specifically, "demand" remained high. What does that mean? It means PEOPLE HAD MONEY TO SPEND TO BUY THINGS THEY NEEDED at a time when "supply" -- and therefore employment and wages -- were contracting, ie WHEN THEY WOULD NOT HAVE HAD IT OTHERWISE.
The CARES act was literally a lifesaver. Anyone who COMPLAINS that it caused inflation is (1) stupid, (2) dishonest, (3) comfortably well off and doesn't care about other people, or (4) more than one of the above.
Also, without the CARES act we would likely be still struggling to pull out of a steep recession.
There is no way to convince anyone that the CARES act did them any good. The belief that voting for Trump will reduce food prices is so deeply implanted that nothing will remove it.
Like the belief that the inflation was Bidens inflation.
+1
Full true.
Even further, the systems built are not flexible nor oriented towards delivering services, they are brittle and focused on profit. At the expense of suffering and very probably lives.
Yay, capitalism.
There was an article in The Daily Kos about this a few years ago on the steady deterioration of our manufacturing and supply chains due to the supposed superiority of JIT (just in time) and "Lean Manufacturing" and the resulting obsession with efficiency to the detriment of resilience.
Japan did not adopt those techniques out of choice - they HAD little choice. The archipelago was not blessed with lots of resources, so they had to scrounge for them - importing scrap metal, importing fuel, etc. One hell of a dancing act on a tight rope, made harder as the European powers (including the US in this) got alarmed by their growing power after they smashed the Russian navy with ridiculous ease.
As people got too focused on efficiency the article made the point that JIT and "Lean Manufacturing" become "no slack in the supply chain" and "Skeletal Manufacturing".
Mais oui.
Kevin, your explanation seems perfectly correct to me. Inflation occurred all over the world, not just in the US. It occurred everywhere that Covid happened.
However, there are a lot of economists out there with their heads firmly planted where the sun doesn't shine, and they probably have their own reasons for an alternate explanation. And there are a lot of people who will be happy to quote them.
Coincidentally, earlier today, I repeated your explanation to an ex-school bus driver who was working the floor at Menards, and he looked at me as if I was saying that pink frogs are running the government and controlling the weather.
So not everyone has heard your explanation yet.
Attributing the recent bout of inflation to covid is perfectly reasonable. Attributing world wide inflation to American legislation is not. On the other hand, pretty much all the world's major economies responded to covid with economic stimuli, which almost certainly collectively had the effect Kevin is attributing to the CARES Act alone.
The US did the largest stimulus, which affected commodity prices world wide. The other stimulus packages contributed as well.
I hadn't seen anywhere that anyone claimed the US stimulus was disproportionately larger than other nations stimulus paackages.
Luckily it was transitory
But the CARES act was signed into law by President Donald Trump on March 27, 2020. But Trump says the only reason we have inflation is because of uppity Kamala.
So you must be wrong.
It's probably because you're married to a childless cat lady.
> Is there more to the story?
You left out the part where corporations raised prices under the cover of transitory inflation in order to increase their profit margins. That contributed a non-trivial amount to the height and width of the inflation spike.
So what does that have to do with the price of chicken?
If people paid more for home improvements or appliances, then I get it. They were idiots. But food? I’m sure I paid more for groceries, but I really didn’t notice or care because I have a job and the change was trivial and I could easily change my choices. It’s all just bullshit.
If you needed a stove, you can't wait for a stove.
If you needed a home, you can't wait for a home.
Alot of spending is only so flexible.
But you can adjust the size of the home and the number of features and quality of the stove.
I'm pretty sure that if you didn't tell people food prices were up very few would have noticed. My shopping bill varies anywhere from $80 to $150 per trip. I'm assuming that's true of most people - the amount you buy varies a lot. Given that variability, how would anyone notice a $10 or even a $20 increase? Individual prices vary all over the place, too, particularly things like produce and meat. These variations are normal. But if you tell people food prices are up they immediately notice anything whose price increases, but not the things whose price decreases.
"I'm pretty sure that if you didn't tell people food prices were up very few would have noticed. ..."
It was very noticeable.
Yeah, that’s exactly my experience. I started paying attention to prices because it was in the news. Otherwise I wouldn’t have cared. I did notice cost of a meal at a restaurant went up, but then I just stopped doing that. Problem solved.
The NY Times tells me it matters because they interviewed idiots.
“In a sign of frustration, an overwhelming majority of Hispanic voters said America’s political and economic systems needed major changes or needed to be torn down entirely. Those who say the systems need to be torn down are more likely to support Mr. Trump.”
Good luck with that.
As an upper middle class white liberal I’m about ready to tell the lower middle class brown people to try their luck with trump. I no longer have any sympathy for their alleged struggles.
“For many Hispanic voters, the Democratic Party remains their home, even as they indicate that it has not helped them directly.”
It’s really political malpractice to give these folks the idea that government can help them “directly”. I guess we need to hold their hands and give them stuff for free. 😂
https://www.nytimes.com/2024/10/13/us/politics/latinos-trump-harris-poll.html
https://www.nytimes.com/2024/10/13/upshot/trump-black-hispanic-voters-harris.html
Because grocery prices didn't go up by the 10$ on a 150$ bill. Your 5$ McDonalds meal went to 7$. People notice that. And grocery prices exploded because in the same year, Eastern Asia, western Europe and western North America had massively reduced crops because of all time record heat waves. (combined with europe's bread basket, the Ukraine loosing their harvestto war.)
I live in the SF Bay Area. Visited family in New Jersey last week. Prices were very noticeably lower there. Gas, of course, about $1.90 per gallon. Pastries at an upscale bakery about 25% cheaper. A large pizza with my preferred toppings at a pizza place I like there was about 50% cheaper. Ordinary groceries were 10-25% cheaper. On the way home I saw a Trump sign on someone’s lawn that said “make groceries affordable again”. I laughed.
I still think that a lot of the inflation was supply-chain issues for which the press translated inneficients in our mythic free efficient markets that economists don't really tout but idiologues and the press buy into. The pandemic reduced demand because (1) people couldn't go to stores enforcing lockdowns and social distancing (and that mattered more even then, while we're moving away from brick and mortar even now) and (2) layoffs in the service sector cut into consumer cash until government action fully kicked in.
So of course business shut stores blah blah blah to recognize the new conditions, except that demand picked back up again. But hey, markets rule.
Its is actually that the markets are extraordinarily efficient, but only under the stable conditions we had that were decades in the making.
Markets have never been extraordinarily efficient )see dutch tulip bubble). That claim requires absolutely no exposure to markets or severe mental defect to believe.
And a fair number of price gouging prosecutions by State AGs here in the US. WA's AG was pretty active here along with a number of others.
Hint to would be cartels/consortiums: Don't claim to consumers that supply chain and other catastrophes (like bird flu) are causing scarcity and higher prices and then boast to your shareholders that you are making unprecedented profits shortly afterwards. Anyone who pays attention to your annual and quarterly reports and 10-Qs will take notice.
One thing I think people are missing is price stickiness, which COVID massively disrupted. Especially B2B prices, which are often based on contracts, often keep inflation and deflation in check. COVID gave businesses chances to raise prices and renegotiate contracts that would not occur under normal circumstances, and because of the chaos, a lot of them got away with more than their actual costs justified. This boosted margins, but now that things have normalized, these temporary gains are being competed away.
The American public doesn't care about "inflation." They care about the price of GAS and the price of EGGS, and if they haven't gone back down, that's INFLATION. Of course, it's not, but that's what they think? Know why? Because the TV news keeps telling us that it's what people think. Who cares what's true -- true journalism today, apparently, consists only of telling us what people believe.
Incidentally, prices went up because of the demand rebound after COVID started to recede and everyone started driving and going to restaurants again.
So it WAS Joe Biden's fault! He shouldn't have rolled out those vaccines! And, of course, he shouldn't have invaded Ukraine and caused bird flu to start spreading. That bastard!
Kevin's right about the broad brush strokes, but an additional $900 billion in relief was attached to the Consolidated Appropriations Act signed into law by Trump in December, 2020, and some $2.1 trillion via the American Rescue Plan Act, signed by Biden into law in March, 2021.
We propped up demand to the tune of $5 trillion—not $2 trillion.
The government was passing out stimulus dollars like candy in 202 and 2021—rightly so. The modest inflation burst was an appropriate price to pay to keep the economy strong.
Basically what I’ve been telling my MAGA coworkers for years. Course, they will never believe me.
"...and some $2.1 trillion via the American Rescue Plan Act, signed by Biden into law in March, 2021."
Which threw gasoline on the fire and made inflation a lot worse.
…and the recovery a lot stronger.
Given the uncertainty around future demand that businesses had and the fact that they had to resolve so many temporary supply side problems......and the fact that so many other nations that didnt have this legislation also experienced inflation and slower resolutions/reopenings.....this is not actually clear at all.
But I realize that you are just throwing sheets on the wall as a loyal follower and repeater of things you are told to repeat.
Milton Friedman would tell you that no government spnding can ever increase inflation. It just redistributes demand. The problem was that the FED spent the entire fall talking about how they were going to need to shortly increase interest rates to combat inflation while still engaging in QE. That's malpractice to a truly extraordinary level.
Milton Friedman would tell you that no government spnding can ever increase inflation.
Well he was wrong on that score. Normally when GDP shrinks incomes also shrink, so the reduction in output doesn't result in "shortages." But that's not how it went down in in 2020-2022: we deliberately reduced the total quantity of goods and services available, but there was no accompanying drop in incomes. So we saw a mechanical increase in the ratio of (1) money to (2) stuff to spend money on.
When too much money is chasing too few goods (and services), the result is inflation.
By the summer of 2021, it was the wrong policy. And since no one remembers the money they got in 2021, democrats will be punished for the inflation. Hilarious.
Harris thinks promising middle class tax cuts will do the trick. It won’t.
What specifically was the 'wrong policy'?
Given that inflation has retreated quickly and the economy both recovered quickly and stayed strong for years afterward, its puzzling that so many motivated reasoners are sure that it was wrong.
This kind of 'success is actually failure and failure is actually success' reasoning is popular with a certain type of person. When they are told this, they nod along and repeat it. Forever.
If Harris loses the election then it was all bad policy, but specifically I was referring to the child tax credit and most of this "American rescue plan" which passed in 2021. Personally, I'd go back further in saying that the stimulus was bad policy also (too much).
If a party or president implement a policy which results in their defeat in the next elections, then it is by definition bad policy. Sometimes good deeds get punished. (most of the time actually!)
And for the record, I don't have young children and didn't get any of these stimulus checks. I had a job and was working full time. So nothing for me - I didn't need it. Screw the ungrateful SOB who received these benefits and vote for trump.
This is a terrible way to think about policy. There is no point to policy. Very Trumpian.
There is also literally no reason to think that this specific policy was at all responsible for a possible election loss.
Another obvious possibility is that this legislation is the only thing keeping the election close and without it the Dems would have lost more ground.
This kind of approach silly and obviously makes zero sense.
In a representative democracy it is the way I think about policy. If you are punished for pursuing a goal, it will be deleted by your opponents when they win. Hopefully, Harris wins and we don’t have to find out.
"What specifically was the 'wrong policy'?" continuing QE in the summer of 2021 (something that should only be done when nothing else is able to prevent deflation) while warning that there was a obvious need to raise interest rates in the near future.
"there's no success like failure and failure's no success at all" - Dylan
"That's it. If supply goes down and demand goes up, you get inflation."
How about "if supply goes down and people still gotta eat..."
"So that's it: Inflation = Pandemic + CARES Act. Those two things started it, and when they faded out they ended it. Neither Joe Biden nor the Fed played more than a minor role." Given that the CARES act was entirely funded by the FED printing 3 trillion dollars the claim of the FED not having a role is ludicrous. But the FED was very concerned about deflation, which is much, much worse than inflation so there behavior could have been much, much worse. (The great depression was so severe because the fed responded to the shrinking economy at the initial stages of the depression, by assuming a smaller economy meant the need to shrink the money supply, causing more deflation, a further reduction in gdp, resulting in the fed further reducing the money supply. Repeat.
I think 85%+ of inflation was caused by Covid and less than 15% was caused by everything else with most of the rest caused by our strong economy.
You shouldn't be putting the CARES Act as one of the causes.