Inflation: What is to Blame
By Joseph Gale, Brooke Levengood, and Aiden Messett – Staff Writers
Inflation has dominated the news as Americans continue to voice their concerns over the eroding value of their hard-earned wages. As the costs of rent, gasoline, food and retail goods continues to climb, many people are looking for a place to put their blame. Unfortunately, the cause of recent inflation is rather difficult to blame on any one factor.
Although there is certainly a great deal of blame to be put on the monumental government spending, we must also consider the effect that COVID-19 has had on global supply chains.
As the world confronted the COVID-19 pandemic in early 2020, the global economy came to a virtual standstill. To try and limit the spread of the virus, policy makers forced businesses to close their doors completely, which many businesses were not prepared for.
American consumers, now unable to spend money on services and leisure activities such as eating out, going to the gym and traveling, instead spent money on products ranging from laptops to exercise equipment and even bread-making materials.
This resulted in a surge of demand in specific segments of the economy that often outpaced supply. When the economy first shut down in March of 2020, manufacturers across the board reduced inventory levels in anticipation of reduced consumer demand due to global lockdowns and job losses.
However, consumer demand increased exponentially quicker than producers had expected due to explosive government stimulus spending which rapidly increased consumer spending, leaving many companies severely undersupplied.
This sudden upshoot in demand caused by government stimulus paired with a sinkhole in supply pushed U.S. inflation to 40-year highs.
Perhaps the most notable impact that COVID-19 has had on supply chains is the standstills of ports and the truck driver shortage. Considering the pandemic forced ports to send home infected employees, most facilities could not maintain service levels. In addition, extremely generous unemployment benefits and stimulus checks from the U.S. government made recruitment efforts futile.
Just as federal stimulus funds flooded consumers with spending money and increased their demand for products, global supply chains came to a standstill and drastically restricted accessibility to goods for both businesses and consumers.
Craig Gallagher, DBA, Operations Management Professor at the University of Scranton, said the pandemic’s effect on the cost of shipping are significant.
“The cost of shipping containers at ports has gone from pre-pandemic lows of around $400 to as high as $2000 for a typically 40-foot container during the pandemic, an increase of about 500%. Companies do not eat these extra costs for charity, they pass it on to consumers,” Gallagher said.
Historically, inflation is caused by excessive demand, as opposed to limitations in supply. When the economy is growing quickly, businesses can afford to hire more employees who will then spend their wages on discretionary items, like cars, TVs, vacations, etc., which drives up the prices of these items.
In 2020 and 2021, a “supply shock” occurred, which means that the supply of goods became very suddenly restricted while demand simultaneously stayed the same, causing prices to skyrocket.
To make matters even worse, the war between Russia and Ukraine has led to a significant surge in commodity and energy prices since Russia, a leading exporter of oil and other popular commodities, was suddenly sanctioned by the U.S. and the European Union.
Before we start pointing fingers at the U.S. government for printing too much money, perhaps we should consider that, according to the U.S. Census Bureau, U.S. fiscal stimulus in 2020 has kept an estimated 53 million American families from poverty!
Not to mention, the U.S. government’s response to the 2008 financial crisis is widely criticized by economists because of their failure to act as quickly or largely enough as was necessary.
As a result, the recession that followed the 2008 mortgage crisis left millions of Americans poverty-stricken and unemployed for many years.
Aram Balagyozyan, Ph. D, Economics Professor at the University of Scranton, said the length of the recession is indicative of the success of the government’s efforts.
“I don’t believe the U.S. government did enough in 2008 to 2009. Why? Simply compare the length of the 2008-09 recession which lasted 18 months with the length of the 2020 recession which lasted only two months,” Balagyozyan said.
Following this intense injection of money into the United States economy, consumers responded by buying retail goods to quench their quarantine-induced restlessness.
According to the U.S. Census Bureau, in 2021, there was $6.594 trillion on spent on retail goods alone, an 18% increase from 2020 levels. Evidently, the sheer amount of cash printed by the federal government and the central bank led to a surge in demand for goods that were hardly making it through ports.
The question remains: Where can Americans place their blame for the 9% erosion of their spending power?
Although the actions taken by the federal government were certainly colossal in size, it is difficult to understand just how much of this inflation can be blamed on rampant fiscal spending and how much of it could be blamed on a distressed supply chain.
Although supply chain issues are beginning to subside rapidly in 2022, inflation is very sticky and difficult to tame once it intensifies. One thing is certain: Inflation has caused severe heartburn for American consumers.