Misconceptions About Inflation

As Americans continue to grapple with high inflation, it is worth examining how we got here and addressing some of the common misconceptions and misleading headlines about what is actually driving inflation. 

When the first signs of inflation began to appear in early April 2021, America was still coming out of what had been an unprecedented period of economic uncertainty owing to the Covid-19 pandemic. Hundreds of thousands of people had lost their lives and the economy had suffered considerably. At that time, policymakers in Washington insisted that massive economic stimulus was necessary to spark the economy and encourage consumer spending. This ultimately culminated in the passage of the $1.9 trillion American Rescue Plan (ARP) that same month.

Unfortunately, what policymakers did not consider was that dumping large sums of stimulus money on the economy may lead to inflation. Unlike previous economic downturns, the one experienced during the duration of the pandemic was very much self-inflicted. While perhaps necessary, reoccurring lockdowns and stringent restrictions on businesses had a devastating impact on the economy.

None-the-less, when many of these restrictions were finally lifted, the economy was bound to bounce back and Americans would again begin spending on goods and services. Therefore, the need for large amounts of stimulus money, $4.6 trillion according to government estimates, was questionable from the very outset. It was money the government did not have and was likely to contribute to inflationary effects.

That is indeed what happened and within a few short months, inflation had hit a 40-year high. A report by the Federal Reserve Bank of San Francisco has since concluded that the “fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to… raising inflation 3 percentage points by the end of 2021.” These findings are consistent with previous warnings by experts and economists, including notably Larry Summers, Jason Furman, and Steven Rattner, all former economic advisors to Obama Whitehouse.

However, none of this stopped the Biden Administration from insisting that inflation would be “transitory,” something quickly parroted by supporters of more stimulus spending. Yet, it is now many months later and inflation is still here. Consumer prices are sky high and appear nowhere close to declining. This, coupled with rising energy prices, have made daily living a struggle for millions of Americans.

Unfortunately, the Biden Administration, as well as many legislative leaders, continue to promote misleading or false statements about the causes of inflation that simply deflect blame from those most responsible. These statements range from claims that inflation is part of “Putin’s price hike” and a “high class problem” that shouldn’t worry voters, to the “greed of meat conglomerates” contributes to supply chain issues.

The Biden Administration has also argued that the high market concentration of some industries, like tech and energy, are at least partially responsible for inflation. Therefore, corrective action is needed to protect consumers from powerful corporate interest. This view is perfectly illustrated by a controversial tweet sent out by Joe Biden’s official Twitter page on May 13th. The offending tweet asked how we could “bring down inflation?” The solution was to “make sure the wealthiest corporations pay their fair share.”

The problems inherent in this statement are many, but notably include the fact that prices for some industries, like tech, have actually fallen considerably over the last 30+ years. According to the U.S. Bureau of Labor Statistics, prices for information technology, hardware and services are 92.63% lower in 2022 than they were in 1988. In general, research suggests that industries with “less” government regulation tend to produce considerably cheaper goods and services.

In addition to pushing for higher taxes on corporations and insinuating that greater government involvement in the marketplace would somehow protect consumers from inflation, the Biden Administration has continued to stubbornly push for greater amounts of federal spending.

In his State of the Union address on March 1st, President Biden outlined his plan to fight inflation by “building a better America.” While an admirable goal, the details of this plan include a number of costly measures such as raising the federal minimum wage to $15 dollars per hour and investing more money in infrastructure. Many more are included in Biden’s $1.7 trillion Build Back Better Plan. Regardless of the wisdom of each of these measures, they would do nothing to fight inflation. If anything, they would likely only exacerbate the problem and add to an inflation rate that, according to Consumer Price Index, hit 8.3% by the end of April.

I think we can all agree that inflation represents a serious problem. It eats away at peoples hard earned savings and adds just one more layer of complication to the lives of millions of Americans just struggling to get by. Americans have said as much in numerous recent polls, which ask them what they consider to be the nation’s biggest problem.

Vague statements of how “Putin” and “corporate greed” are responsible for the current state of affairs, will not alleviate high consumer prices. Instead, our elected leaders would be wise to take proactive steps to cut back on reckless government spending and regulatory impediments that simple push prices higher.

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