Addressing Inflation Misconceptions
I have friends across the political spectrum, and that often gives me an interesting view of how people with different political inclinations view a particular topic. Lately I have noticed a real divergence between two different groups on what is causing inflation. Neither view is correct, so let’s address inflation.
The View from the Left
First, what is inflation? Inflation is typically measured by the change in the consumer price index (CPI), which is defined by a market basket of consumer goods and services. If the CPI is rising too quickly, it erodes a consumer’s buying power.
Lately I have seen a number of comments and memes from my friends on the Left that go something like this. They have noted that corporate profits are presently high, and they say “Aha! So it wasn’t just supply chain issues. Companies were making big profits, and that helped drive inflation.”
This has cause and effect backwards.
Inflation is caused by too many dollars chasing too few goods and services. A company that can’t keep up with demand may try to counter that by raising prices. That’s Economics 101. Such price increases often have no relation to their actual costs, but are rather an attempt to preserve inventory. It’s called rationing by price. The alternative scenario is that they simply run out of stuff to sell.
However, that can lead to big profits. So, profits and inflation are related in this case, but folks have mixed up cause and effect. Inflation led to high profits, not vice versa.
But there is another factor at play. Too many people forget that companies are in business to make money. Another reason to raise prices is simply that you can. If you are selling widgets for $1.00 each, and figure out that you can raise the price to $2.00 and still sell nearly as many widgets, just about any company is going to do that. They will charge the highest prices the market can bear.
When inflation is high, again it’s because too many dollars are chasing too few goods. In that environment, a company can get away with raising prices simply because consumers are willing to pay. Why are they willing to put up with higher prices? That leads me to the misconception on the Right.
The View from the Right
My friends on the Right are absolutely certain they know the reason inflation has surged: President Biden’s policies. However, they seem to be forgetting history.
To be clear, if you give cash payments to everyone, there will be a spending spree. People who usually don’t have extra money to spend will buy all sorts of things. My brother works for the U.S. Postal Service. He told me that after the first round of $1,200 stimulus checks went out in April 2020, you would have thought it was Christmas judging by the number of items people were receiving in the mail. All the extra money sent to taxpayers put upward pressure on prices.
The Trump administration passed the first batch of stimulus as the COVID-19 pandemic began to impact the economy. The administration also passed Pandemic Unemployment Assistance (PUA). I wrote multiple articles at that time explaining that, regardless of the underlying need, these policies would drive inflation higher. People suddenly had money they didn’t have previously, and they were going to spend it on things.
I wrote other articles explaining that the PUA system, which certainly was needed for many people, created incentives not to work. I know this for a fact, because I helped multiple people navigate the system. And I literally heard people say “Why would I go back to work for $400 a week when PUA is paying me $600 a week to stay home?” We were paying some people more money to stay home than they would have made working, and worsening the supply chain issues.
President Trump also exacerbated the situation with various tariffs. Those necessarily drive the price of goods higher. Tariffs increase the price of cheap imports, with the intent of creating incentives for consumers to buy American-made goods. But, that increases prices.
My friends on the Right who blame President Biden for inflation seem to have conveniently forgotten Trump’s role. Changes to the economy don’t happen instantly. Inflation turned upward before Trump left office, and Biden has dealt with that continuing trend.
That’s not to say that Biden’s policies haven’t contributed. In many cases, he has done the same thing Trump did. Biden passed another stimulus payment shortly after taking office. He has passed various child tax credits. He renewed some of Trump’s tariffs. All of those things contributed.
Finally, one of the biggest drivers of inflation has been the surge in energy prices. The reasons for that are well understood, even though they aren’t readily acknowledged by those wishing to assign blame.
I have discussed the reasons previously, but they are primarily a result of the pandemic crushing oil demand, the price of oil crashing in turn, and many producers going out of business. You could blame “stay-at-home” policies early in the pandemic for helping to crush demand, but there were many factors. People weren’t flying. They just weren’t getting out.
Oil demand was crushed as a result, and oil supply followed. Then when demand recovered, oil demand lagged behind. That caused oil prices to soar, beginning about four months before President Trump left office. But if you want to assign blame for that one, you can primarily blame COVID. That’s not to say that policies had no effect, but the vast majority of the energy price surge can be blamed squarely on the pandemic.
Those are the primary reasons inflation is surging. It’s not solely the fault of one party, even though some are (wrongly) certain they know the cause and effect.
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