All of these countries have one thing in common: they’re all trying to recover from a once-in-a-lifetime pandemic that’s still wreaking havoc on the economy’s supply chain, making it difficult for businesses, workers, and the global supply chain to operate at full capacity and meet soaring consumer demand. It’s probably more appropriate to state “COVID did that” than of placing a Biden “I did that” sticker on things with increasing pricing.
However, there is a real disagreement concerning President Biden’s $1.9 trillion American Rescue Plan’s economic implications. Massive federal expenditure packages to combat COVID began under President Trump, with bipartisan support at first. The American Rescue Plan, which advocates claim saved the economy and continues to fuel its rise, maintained President Biden’s spending spree. The United States’ “economic recovery is stronger and faster than anyplace else in the globe,” according to the White House. This is supported by data. The United States has had much faster economic growth than other advanced countries. In 2021, the stock market in the United States increased by over 27%. The unemployment rate has dropped to 3.9%. On many fronts, America’s recovery appears to be strong, and it would not have been as strong if not for all of these extra Biden dollars swimming about the economy.
However, detractors contend that all this money floating around resulted in an increase in demand for products and services, adding to supply chain overload, shortages, and rising prices. According to the Pew Research Center, the United States experienced one of the largest inflation rate increases in the world between 2019 and 2021, trailing only Brazil and Turkey. The massive increase in demand for durable products that has occurred in America in recent years has not occurred in Europe or Asia, at least not on the same scale. Observers point the finger at America’s massive stimulus packages, which surpassed Europe’s and provided many Americans with significant sums of cash to spend. This money aided America’s seemingly insatiable need for foreign-made goods, which has been a key cause of global shipping instability, which has contributed to price rises.
The US Bureau of Labor Statistics announced last week that the average American worker’s real wages that is, the value of their paychecks after inflation had fallen by 2.4 percent over the previous year. Surging inflation reduced many Americans’ standard of living in 2021, despite a tight labor market, salary raises, and millions of new jobs created.
“Inflation is a worldwide concern,” President Biden said in a statement last week, “emerging in practically every developed nation as it recovers from the current economic recession.” “America is fortunate to have one of the fastest-growing economies in the world, thanks in part to the American Rescue Plan, which allows us to respond to price rises while maintaining robust, long-term economic development. That is my objective, and I am working hard every day to achieve it.”
Biden has taken actions to reduce gas costs, including releasing 50 million barrels of oil from America’s Strategic Petroleum Reserve and requesting that the Organization of Petroleum-Exporting Countries (OPEC) and other oil-producing nations raise production (they said no). Conservatives and business organizations want the president to do more to encourage domestic drilling, but even that is unlikely to change the price of oil, which is mostly determined on a global scale. The president’s ability to cut the price of oil is limited.
The president’s powers are similarly limited when it comes to combating inflation in general. Lowering tariffs has been urged by economists, including President Biden’s own Treasury Secretary Janet Yellen, but this would likely only make a tiny effect, especially while the global supply chain remains jammed. The Federal Reserve, which is self-contained, has the capacity to control inflation. It can (and will) raise interest rates to attempt to drive prices down, but this will almost certainly result in a downturn in the economy, pain for American workers, and a drop in stock, housing, and other asset markets.
It’s A Crummy Time To Be A World Leader
According to the Reuters/Ipsos polling tracker, a newly elected Biden had a 59 percent approval rating in March, with the distribution of vaccines and the popular American Rescue Plan slated to put the wind back in America’s sails. However, the pandemic has refused to go away quietly in the last six months, and inflation has soared. Biden’s approval rating has risen to 45 percent.
The economy and President Biden’s approval ratings may have looked a lot better if everyone had gotten vaccinated or if the Delta and Omicron varieties hadn’t exploded onto the scene. Since the beginning of the pandemic, economists have been advising us that the only way to recover is to end the pandemic. When broad swaths of society refuse to cooperate, it’s difficult to put an end to the pandemic.
Biden isn’t the only world leader whose popularity is plummeting. Most leaders witnessed an increase in their poll numbers at the start of the pandemic. The “rally-round-flag phenomenon,” which occurs when nations confront existential dangers, was credited by pollsters. However, while the pandemic continues, leaders are grappling with rising prices and pandemic fatigue.
Only five of the 13 world leaders monitored by Morning Consult have a net approval rating. From socialist Spanish Prime Minister Pedro Snchez to centrist French President Emmanuel Macron to conservative United Kingdom Prime Minister Boris Johnson to right-wing Brazilian president Jair Bolsonaro, a diverse set of leaders today have approval ratings below 40%.
Unfortunately for President Biden, Americans have a strong tendency to blame presidents for economic issues (while crediting them for economic successes), regardless of whether their policies are to fault. The White House has been experimenting with a messaging strategy to blame inflation on corporate America’s dominant power and greed. So far, it doesn’t appear to be working, and according to The Washington Post, even some White House officials aren’t fond of the strategy. While monopoly power and greed do result in higher pricing for customers, there is no evidence that they have gotten worse or driven prices up much in the recent year.
It has been claimed that sales of presidential candidate Halloween masks can forecast who would win presidential elections. If you’re a Democrat, you’d better pray that sticker sales don’t foretell the outcome of the midterm elections.
RELATED: Inflation: Gas prices will get even higher
Inflation is defined as a rise in the price of goods and services in an economy over time. When there is too much money chasing too few products, inflation occurs. After the dot-com bubble burst in the early 2000s, the Federal Reserve kept interest rates low to try to boost the economy. More people borrowed money and spent it on products and services as a result of this. Prices will rise when there is a greater demand for goods and services than what is available, as businesses try to earn a profit. Increases in the cost of manufacturing, such as rising fuel prices or labor, can also produce inflation.
There are various reasons why inflation may occur in 2022. The first reason is that since Russia’s invasion of Ukraine, oil prices have risen dramatically. As a result, petrol and other transportation costs have increased. Furthermore, in order to stimulate the economy, the Fed has kept interest rates low. As a result, more people are borrowing and spending money, contributing to inflation. Finally, wages have been increasing in recent years, putting upward pressure on pricing.
In economics, who is to blame for inflation?
Inflation is measured using two methods: the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) (CPI). The WPI is a measure of the average change in wholesale market or wholesale level pricing of items. The Consumer Price Index (CPI) is a measure of change in the retail price of goods and services consumed by a population in a certain area over a given year.
Inflation control is one of the RBI’s primary responsibilities. The RBI controls inflation by adjusting interest rates. The RBI wants to make loans more expensive by raising lending rates, which will discourage borrowing, which will lead to less expenditure. Prices stop rising when consumers spend less money, and inflation moderates. Deflation, on the other hand, allows the RBI to lower interest rates.
When inflation helps to stimulate consumption and consumer demand, which drives economic growth, it is considered as a positive. Some people believe inflation is necessary to prevent deflation, while others say it is a drag on the economy. When the economy isn’t operating at full capacity, such as when there’s unsold labor or resources, inflation can theoretically assist boost output. It also helps debtors by allowing them to repay their loans with money that is less valued than the money they borrowed.
Deflation, like inflation, can be a continuous cycle. When prices continue to fall over time, consumers are able to save money in the long run, resulting in lower demand and greater deflation. A drop in sales is bad for business earnings. As a result, businesses are hesitant to invest in new projects. All of this causes the economy to slow down. Getting out of a deflationary spiral is a difficult task for many countries.
People with huge debts will profit from inflation since they will be able to pay them off more readily as prices rise. Those who preserve cash reserves and those with fixed wages will be harmed.
Deflation will help consumers in the short term by lowering the cost of products. When the price of items falls, it enhances consumers’ purchasing power and allows them to save more money.
Who will be the hardest hit by inflation?
Inflation is defined as a steady increase in the price level. Inflation means that money loses its purchasing power and can buy fewer products than before.
- Inflation will assist people with huge debts, making it simpler to repay their debts as prices rise.
Losers from inflation
Savers. Historically, savers have lost money due to inflation. When prices rise, money loses its worth, and savings lose their true value. People who had saved their entire lives, for example, could have the value of their savings wiped out during periods of hyperinflation since their savings became effectively useless at higher prices.
Inflation and Savings
This graph depicts a US Dollar’s purchasing power. The worth of a dollar decreases during periods of increased inflation, such as 1945-46 and the mid-1970s. Between 1940 and 1982, the value of one dollar plummeted by 85 percent, from 700 to 100.
- If a saver can earn an interest rate higher than the rate of inflation, they will be protected against inflation. If, for example, inflation is 5% and banks offer a 7% interest rate, those who save in a bank will nevertheless see a real increase in the value of their funds.
If we have both high inflation and low interest rates, savers are far more likely to lose money. In the aftermath of the 2008 credit crisis, for example, inflation soared to 5% (owing to cost-push reasons), while interest rates were slashed to 0.5 percent. As a result, savers lost money at this time.
Workers with fixed-wage contracts are another group that could be harmed by inflation. Assume that workers’ wages are frozen and that inflation is 5%. It means their salaries will buy 5% less at the end of the year than they did at the beginning.
CPI inflation was higher than nominal wage increases from 2008 to 2014, resulting in a real wage drop.
Despite the fact that inflation was modest (by UK historical norms), many workers saw their real pay decline.
- Workers in non-unionized jobs may be particularly harmed by inflation since they have less negotiating leverage to seek higher nominal salaries to keep up with growing inflation.
- Those who are close to poverty will be harmed the most during this era of negative real wages. Higher-income people will be able to absorb a drop in real wages. Even a small increase in pricing might make purchasing products and services more challenging. Food banks were used more frequently in the UK from 2009 to 2017.
- Inflation in the UK was over 20% in the 1970s, yet salaries climbed to keep up with growing inflation, thus workers continued to see real wage increases. In fact, in the 1970s, growing salaries were a source of inflation.
Inflationary pressures may prompt the government or central bank to raise interest rates. A higher borrowing rate will result as a result of this. As a result, homeowners with variable mortgage rates may notice considerable increases in their monthly payments.
The UK underwent an economic boom in the late 1980s, with high growth but close to 10% inflation; as a result of the overheating economy, the government hiked interest rates. This resulted in a sharp increase in mortgage rates, which was generally unanticipated. Many homeowners were unable to afford increasing mortgage payments and hence defaulted on their obligations.
Indirectly, rising inflation in the 1980s increased mortgage payments, causing many people to lose their homes.
- Higher inflation, on the other hand, does not always imply higher interest rates. There was cost-push inflation following the 2008 recession, but the Bank of England did not raise interest rates (they felt inflation would be temporary). As a result, mortgage holders witnessed lower variable rates and lower mortgage payments as a percentage of income.
Inflation that is both high and fluctuating generates anxiety for consumers, banks, and businesses. There is a reluctance to invest, which could result in poorer economic growth and fewer job opportunities. As a result, increased inflation is linked to a decline in economic prospects over time.
If UK inflation is higher than that of our competitors, UK goods would become less competitive, and exporters will see a drop in demand and find it difficult to sell their products.
Winners from inflation
Inflationary pressures might make it easier to repay outstanding debt. Businesses will be able to raise consumer prices and utilize the additional cash to pay off debts.
- However, if a bank borrowed money from a bank at a variable mortgage rate. If inflation rises and the bank raises interest rates, the cost of debt repayments will climb.
Inflation can make it easier for the government to pay off its debt in real terms (public debt as a percent of GDP)
This is especially true if inflation exceeds expectations. Because markets predicted low inflation in the 1960s, the government was able to sell government bonds at cheap interest rates. Inflation was higher than projected in the 1970s and higher than the yield on a government bond. As a result, bondholders experienced a decrease in the real value of their bonds, while the government saw a reduction in the real value of its debt.
In the 1970s, unexpected inflation (due to an oil price shock) aided in the reduction of government debt burdens in a number of countries, including the United States.
The nominal value of government debt increased between 1945 and 1991, although inflation and economic growth caused the national debt to shrink as a percentage of GDP.
Those with savings may notice a quick drop in the real worth of their savings during a period of hyperinflation. Those who own actual assets, on the other hand, are usually safe. Land, factories, and machines, for example, will keep their value.
During instances of hyperinflation, demand for assets such as gold and silver often increases. Because gold cannot be printed, it cannot be subjected to the same inflationary forces as paper money.
However, it is important to remember that purchasing gold during a period of inflation does not ensure an increase in real value. This is due to the fact that the price of gold is susceptible to speculative pressures. The price of gold, for example, peaked in 1980 and then plummeted.
Holding gold, on the other hand, is a method to secure genuine wealth in a way that money cannot.
Bank profit margins tend to expand during periods of negative real interest rates. Lending rates are greater than saving rates, with base rates near zero and very low savings rates.
Anecdotal evidence
Germany’s inflation rate reached astronomical levels between 1922 and 1924, making it a good illustration of high inflation.
Middle-class workers who had put a lifetime’s earnings into their pension fund discovered that it was useless in 1924. One middle-class clerk cashed his retirement fund and used money to buy a cup of coffee after working for 40 years.
Fear, uncertainty, and bewilderment arose as a result of the hyperinflation. People reacted by attempting to purchase anything physical such as buttons or cloth that might carry more worth than money.
However, not everyone was affected in the same way. Farmers fared handsomely as food prices continued to increase. Due to inflation, which reduced the real worth of debt, businesses that had borrowed huge sums realized that their debts had practically vanished. These companies could take over companies that had gone out of business due to inflationary costs.
Inflation this high can cause enormous resentment since it appears to be an unfair means to allocate wealth from savers to borrowers.
What causes inflation, exactly?
They claim supply chain challenges, growing demand, production costs, and large swathes of relief funding all have a part, although politicians tends to blame the supply chain or the $1.9 trillion American Rescue Plan Act of 2021 as the main reasons.
A more apolitical perspective would say that everyone has a role to play in reducing the amount of distance a dollar can travel.
“There’s a convergence of elements it’s both,” said David Wessel, head of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. “There are several factors that have driven up demand and prevented supply from responding appropriately, resulting in inflation.”
In 2021, what caused inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
Inflation favours whom?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.
How much will inflation be in 2021?
The United States’ annual inflation rate has risen from 3.2 percent in 2011 to 4.7 percent in 2021. This suggests that the dollar’s purchasing power has deteriorated in recent years.
Who is affected by inflation?
Unexpected inflation hurts lenders since the money they are paid back has less purchasing power than the money they lent out. Unexpected inflation benefits borrowers since the money they repay is worth less than the money they borrowed.
Is inflation likely to worsen?
If inflation stays at current levels, it will be determined by the path of the epidemic in the United States and overseas, the amount of further economic support (if any) provided by the government and the Federal Reserve, and how people evaluate future inflation prospects.
The cost and availability of inputs the stuff that businesses need to make their products and services is a major factor.
The lack of semiconductor chips, an important ingredient, has pushed up prices in the auto industry, much as rising lumber prices have pushed up construction expenses. Oil, another important input, has also been growing in price. However, for these inputs to have a long-term impact on inflation, prices would have to continue rising at the current rate.
As an economist who has spent decades analyzing macroeconomic events, I believe that this is unlikely to occur. For starters, oil prices have leveled out. For instance, while transportation costs are rising, they are not increasing as quickly as they have in the past.
As a result, inflation is expected to moderate in 2022, albeit it will remain higher than it was prior to the pandemic. The Wall Street Journal polled economists in early January, and they predicted that inflation will be around 3% in the coming year.
However, supply interruptions will continue to buffet the US (and the global economy) as long as surprises occur, such as China shutting down substantial sectors of its economy in pursuit of its COVID zero-tolerance policy or armed conflicts affecting oil supply.
We can’t blame any single institution or political party for inflation because there are so many contributing factors. Individuals and businesses were able to continue buying products and services as a result of the $4 trillion federal government spending during the Trump presidency, which helped to keep prices stable. At the same time, the Federal Reserve’s commitment to low interest rates and emergency financing protected the economy from collapsing, which would have resulted in even more precipitous price drops.
The $1.9 trillion American Rescue Plan passed under Biden’s presidency adds to price pressures, although not nearly as much as energy price hikes, specific shortages, and labor supply decreases. The latter two have more to do with the pandemic than with specific measures.
Some claim that the government’s generous and increased unemployment insurance benefits restricted labor supply, causing businesses to bid up salaries and pass them on to consumers. However, there is no proof that this was the case, and in any case, those advantages have now expired and can no longer be blamed for ongoing inflation.
It’s also worth remembering that inflation is likely a necessary side effect of economic aid, which has helped keep Americans out of destitution and businesses afloat during a period of unprecedented hardship.
Inflation would have been lower if the economic recovery packages had not offered financial assistance to both workers and businesses, and if the Federal Reserve had not lowered interest rates and purchased US government debt. However, those decreased rates would have come at the expense of a slew of bankruptcies, increased unemployment, and severe economic suffering for families.