The news that the United States experienced an inflation rate of 7 percent over the past year was eye-opening. Layered over with the pandemic effects of COVID-19 has led to much discussion among economists about the underlying causes of the highest inflation rate in the U.S. since 1979 to 1981.
Nothing about the past two years economically has been normal or routine or easily discernible from an Economics 101 class. Inflation is frequently the result of increased production costs, albeit this is usually incremental. It is also a result of increases on the demand side for both products and services.
Most economists will agree, however, that this 7 percent increase in inflation is the result of an unusually complex set of circumstances. Here’s what I know. I was planning to add a garage-type pole barn this past fall, but the cost of sheet metal more than doubled, adding about $15,000 to the project. Of course, the project came to a full stop. I’m banking on the old adage that “what goes up must come down,” even though I think that expression may have more to do with Newtonian physics than macroeconomics.
This case of pandemic inflation, however, requires a closer look over the past two years of the effects of microeconomics. While macroeconomics has to do with fiscal policy and money supply, microeconomics has primarily to do with decisions we, as individuals, make that may affect the economy. During the pandemic, for example, people have increased their grocery shopping in deference to eating at home instead of in restaurants. That increased demand for grocery products has affected prices. Shortages in labor because of the virus and what’s come to be known as the “Great Resignation” has led to companies increasing wages to lure more people back into the labor market, again increasing production and services costs, which we as consumers have to pay for. Winter storms and tariffs have also affected the supply chain, which in turn affects the prices we pay. These increases in wages, production and distribution costs are indexed in the Production Price Index (PPI) which clearly shows what’s been happening to prices… as if we couldn’t tell just by going to the store or trying to buy ground beef or build a pole barn.
Another more cynical aspect to increased prices has had to do with the “middle-man” effect. For example, demand for meat at grocery stores has increased along with prices because of the change in pandemic eating habits, but meat processors have taken note of this increased demand and pushed up their prices to stores to whom they distribute. Same goes for other opportunistic supply and distribution industries.
Another big factor in price increases is the fact that it’s estimated the trucking industry is short 80,000 drivers because of the virus, retirements and poor wages, all again affecting supplies.
Adding complexity to all this is the stubborn supply-chain problem, which fits easily into the supply-demand-cost calculus. If there is a supply-chain problem, whether it be a container bottleneck, a commodity supply problem due to labor shortages, tariffs, trucking, or other pandemic-related issue, the shortages result in price increases. Example: If there are only a few Mickey Mantle, Willy Mays or Ted Williams rookie baseball cards left in the world the price of those cards skyrockets. Yes, I’m a collector.
Finally, back to macroeconomics. Federal Reserve interest rates have been very low based on policy strategies to stimulate us out of the 2007-2009 “Great Recession.” Add to the inexpensive money, infrastructure spending, the administration’s American Rescue Plan providing assistance to businesses during the pandemic, extended unemployment benefits, expansion of the child tax credit and increased food aid, among other things, and these assistances added money to the economy that also had an impact on pricing.
What can we expect will happen as a result of this inflation pandemic over the next year? Well, much will depend on the evolving behavior of this mean and relentless coronavirus. But for the sake of positivity, the Federal Reserve has announced that there will be a series of increases in interest rates over the next year. Most expect these increases will occur in four sequential events over the next 12 months. That will have the effect of slowing the economy down and hopefully inflationary prices as well.
It’s also a reasonable assumption that supply-chain disruptions will ease over the next 12 months, smoothing out supply problems that have driven up prices. New access to European steel through recent tariff agreements (November 2021 ) will hopefully help to bring down the price of my pole barn.
Unemployment is low now as “baby-boomers” have left the workforce during the pandemic, never to return. Unemployment payments will likely lessen along with the expiring expanded child-tax credits, further stemming additional flows of money into the economy.
But the bottom line is there are still a lot of variables. Will new variants of the coronavirus continue to plague the workforce? Will increased wages used to lure folks back into the workplace pump more money into the economy and push up prices? Will the supply-chain bottlenecks smooth out and take the pressure off the supply side? Will people decide they’re done with home improvement projects, taking pressure off supplies of building materials? Will work from home be the new norm? Will Vladimir Putin decide to invade Ukraine creating another crisis?
Welcome to 2022’s opaque crystal ball. It’s full of questions without any surefire answers. One thing is certain, however, about the coming year. Microeconomics will play a bigger role. How individuals respond to evolving circumstances and the decisions they make about employment, spending, savings, borrowing and health care will have a significant impact on the potential of an inflationary pandemic in 2022.
Bill Sims is a Hillsboro resident, retired president of the Denver Council on Foreign Relations, an author and runs a small farm in Berrysville with his wife. He is a former educator, executive and foundation president.