Is Inflation Different Now?

Economics Financial Justice
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Pearl River     There’s a lot of drum-thumping about inflation now.  How bad will it be?  Who will it hurt?  How long will it last?  It’s easy to scare up some fuss, since it’s been a minute since we’ve dealt with much inflation, especially over the last decade.  The doom and gloom folks are seeing this as the end of President Biden’s presidency and life as we know it.  I’m not so sure about any of this.  Looking and listening for support for this position, as I ran to Lowe’s at six in the morning for a sump pump, a decidedly not Black Friday purchase, I also heard an economist from the University of Michigan who seemed to have her feet solidly on the ground, and standing not too far from me.

            In a nutshell, she argued that, yes, it is different, and, yes, in fact, it should be temporary, although temporary might be a couple of years.   Contrary to the Fox News politicized spin that all of this is coming from too many supplemental pandemic payments, her argument was old school Adam Smith economics 101:  supply and demand.

            The pandemic payments allowed people to blunt the worst of the crisis, but, basically, people are sitting on more money than they are used to having, because they haven’t had a way to go out and spend it like they might have during the on-again, off-again shutdowns of the pandemic.  Money that might have been spent at restaurants, on travel, on vacations, on weddings, parties, and family gatherings, and even commuting and work lunches for some, was lying large in bank accounts, while credit card debts were being paid down.  Furthermore, turning the entire country into a nation of semi-shut-ins had also changed buying patterns so that they could handle being homebound.  They were buying more electronic toys, computers, home gyms and what nots, many of which depended on computer chips.  Slow walk to now as the country has been opening up and wallets have popped wide open too, so demand for all manner of things is soaring.  Prices are going up, but they are not stopping expectations of record levels of holiday spending and general consumer spending.

            All of which left the just-in-time supply chain broken as well as the dependency on low-cost country primary suppliers for all manner of goods and the pieces that make them work.  The Michigan economist calmly took the position, that this level of demand would force business to invest and expand to meet it, as well as change some of the locus of investment.  New plants would be built, so that up and down the line, things would balance out, along with prices, which is how we get back to inflation.  It just might take another minute as well.

            Importantly, she also argued that this inflation was different because it was raising wages for workers at the bottom on the wage scale in the service industries this time.  The decrease in union collective bargaining agreements meant that the increases were not getting baked into multi-year agreements, but were meeting workers’ demands right now, as companies scrambled for workers, making wage inflation likely more temporary as well.  Generally, she argued that this time inflation was closing gaps, rather than widening them, making it not such a bad thing.

Maybe it really won’t last long.  Gas prices, for example, already seem to be falling.  Contrary to many opinions, maybe the sky is also in fact not falling after all.  We’ll see, but maybe a dose of inflations might not be such a bad thing right now, if it levels off over the next six months or so.  Best we stay tranquil for a bit and see what shakes out here, before jumping to too many conclusions.