Economics/Class Relations

Why is inflation still so high in America?

The Signal

Why is inflation still so high in America? Zachary Carter on the war, the pandemic, and the changing ways economists are looking at the world.
Jordan Madrid
Jordan Madrid
U.S. Inflation hit a 40-year record in March, with the Consumer Price Index up by 8.5 percent from 12 months earlier. The cost of rising prices is significant for Americans: an extra $5,200 for the median household this year compared to last for the same goods and services. Inflation is having political effects, too: Perceptions of a weak economy are contributing to President Joe Biden’s low approval ratings, increasing the chances of major losses for the Democratic Party in November’s U.S. midterm elections. Many economists predicted that steep inflation was only temporary—or in the language of the U.S. Federal Reserve, “transitory.” Of course, they wouldn’t have foreseen the war in Ukraine, which has pushed up prices for gasoline and energy, but the costs of food and services are also continuing to climb. What’s going on?
Zachary Carter is an American journalist and the author of the 2021 Hillman Prize–winning book about John Maynard Keynes and Keynesian economics, The Price of Peace. According to Carter, Russia’s invasion of Ukraine is behind a lot of the elevated inflation these days, but the pandemic continues to drive high rates, as well, with factories in China shutting down in the latest wave of Covid infections there. In the U.S., consumers are still spending money at the same historically high levels as last year, despite rising prices. As Carter sees it, this paradox illustrates the difficulty of understanding inflation: It varies between countries, within countries, and person by person, depending on what they purchase. People tend to respond differently to price hikes than they do to other negative economic data. And their concerns about today’s unprecedented inflation numbers reflect not just anxiety about them directly but also a more general gloominess about the pandemic. Meanwhile, Carter says, Covid-19 has forced dramatic shifts in how economists and the general public think about inflation: All the old models have failed to explain what’s happening, and new ideas are just beginning to take shape.
Michael Bluhm: How has the war affected inflation?
Zachary Carter: The most obvious problem for the global economy now is the disruption of raw materials from Russia and, to a lesser extent, Ukraine. Ukraine’s biggest effect is on wheat prices, because much of the developing world relies on Ukraine for relatively low-cost wheat.
Russia’s supplies of oil and gas are extremely prominent—and an important issue politically in the United States. But Russia also produces an enormous amount of base metals, like nickel and iron. These are necessary to make nitrogen-based fertilizer, so it’s harder and more expensive to get the things that make food grow at a relatively efficient clip.
Overwhelmingly, the inflation story resulting from the war is about energy, heavy-metal production, and food—all of that’s getting more expensive.
Bluhm: The figure of 8.5 percent for March inflation is a striking number. How much of that is on account of the war?
Carter: The 8.5-percent figure for March is curious. The headline number is frightening because it’s the highest in decades, but the prices of goods are less frightening. It’s unclear how much of this is from the war or other causes, though energy prices are a big part of it.
Prices of consumer goods seem to be leveling off, relative to January and February. The prices of services went up, but the prices of services provided by Americans aren’t as dependent on Russian nickel or natural gas. There is a connection in some industries, but you wouldn’t expect to see the price of software consulting go up because of a war in Ukraine.
A huge part of the inflation we’re seeing now is from what’s happening in Ukraine, but there are other dynamics in play—not all of which are well understood even by economists. One key thing to understand is that economists are looking at inflation with a great deal of historical insight and deep knowledge of the markets, but they’re still piecing it together, week by week and month by month, as new data arrive. There’s no generally accepted theory of inflation that’s going to generate robust, obvious answers about what’s going on and what’s causing it.
Bluhm: The pandemic was the original source for these recent months of high inflation. Even now, many factories are closed in Shanghai as part of China’s zero-tolerance policy on Covid-19. How do you think about the pandemic’s effect on inflation?
Carter: We’re not done with the pandemic affecting inflation. We’re seeing huge shutdowns in manufacturing in China. That is one respect in which the inflation numbers are underselling how bad the problem is with energy prices. Energy prices are up as a result of much Russian energy coming off the market, but at the same time, there’s less global demand for energy, because there’s less manufacturing in China.
We don’t know what the effects of lower production in China will be in three to 12 months, but it’s reasonable to predict higher global demand for energy, as China ends this wave of shutdowns, and to predict fewer goods on the market from it.
Whatever you think of the numbers now, the outlook over the next 12 months is quite bleak. I would expect inflation to get higher over the course of the year because of the pandemic and the war. Even when the medical aspect of the pandemic has passed, the productive aspect will not be over for some time.
New York Public Library
New York Public Library
More from Zachary Carter at The Signal:
For the past century, economists thought about inflation as a global brake or limit on prosperity. It prevents the economy from getting better even when you promote the things that encourage economic growth, such as more consumption, higher pay for workers, more jobs, more production, or more economic activity. More of those things is always good—until you hit high inflation. High inflation starts eating into the gains you get from all this economically productive activity. The outcome economists are most concerned about is inflation rising faster than wages, and most households being worse off. There’s a threshold where high inflation takes away more than economic growth gives—but it is hard to say where that point is for most people.”
Americans tend to really hate inflation, independently of whether their earnings are keeping pace with price increases. There does seem to be a psychological effect: People are more offended by price increases than they are grateful for pay raises. You get funny opinion polls in periods of high inflation, where people say the job market sucks when it’s not true that the job market sucks. The job market is probably the best it’s been in 50 years, on the whole. But people experience that very differently across the U.S. If your wages have gone up 11 percent, that seems great. But a lot of government financial support during the pandemic has ended, so a lot of people are now making more money than before the pandemic, but they’re getting less money than they were a year ago—and working more.”
Inflation is an extremely potent political issue in the United States. People’s sensitivity to it is so strong that they’ll see it as a stand-in for their overall well-being. If you’re miserable because you can never leave your house and your loved ones got Covid, then you might report that a 7 percent increase in the price of food was a serious hardship for you—even if it’s a relatively mild annoyance compared with these other terrible things in your life. A lot of pandemic-related stress will be projected onto inflation. The pandemic has been really tough on people, and that’s going to color their interpretations of the economy for quite a while. In America, we tend to talk about the pandemic in terms of masks and lockdowns, but its economic effects are going to be with us for a long time—and the political implications of those effects are bad for incumbents everywhere.”

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