Experts discuss the future of inflation
On January 12, the consumer price index – a measure of changes in the cost of goods and services published by the US Bureau of Labor Statistics – showed a jump of 7% in December 2021 compared to the last year. This is the largest one-year increase since June 1982.
We asked two UC Irvine researchers who closely follow the trend — Christopher Schwarz, associate professor of finance, and Eric Swanson, professor of economics — to share their expertise on inflation and why it’s happening. product and what can curb the rise in consumer prices.
Q: What is causing this current inflation?
Schwarz: The three main factors impacting inflation: rebounding prices, supply chain issues and stimulus packages.
When it comes to the price rebound, many of the price increases we see are due to comparative bias. For example, if we compare fuel prices to 2019, they are not this much higher. But compared to 2020, when oil literally hit -$37 a barrel at one point, prices look very high.
Our modern supply chain is designed to be global and just-in-time. Obviously, it’s not something that works well with constant downtime. General Motors has cars that have, on average, 14,000 parts. These parts are supplied by 3,200 companies in 10,000 different facilities around the world. When this supply chain is interrupted, huge problems arise.
Finally, people have, on the whole, a lot of money to spend. Stimulus packages totaling trillions of dollars — many in direct consumer payments — have been passed. Even California distributed checks. People just have a lot of money to spend.
Swanson: Low supply and high demand. Supply is low mainly due to supply chain disruptions which have been widely reported in the press. For example, there have been factory closures and city-wide shutdowns in the United States and abroad that have delayed the production and shipment of goods throughout the supply chain. supply, and we are still working on any backlogs that have been created. At the same time, demand has been strong. Although some consumers have experienced a drop in income due to the pandemic, many have not due to increased government payments for unemployment insurance and stimulus checks. Additionally, many consumers have drastically reduced their consumption during the pandemic – for example, they haven’t traveled much or dined out a lot – so they have more savings in the bank than normal and they have pent-up demand for goods. of consumption. US consumer spending has returned to its pre-COVID trend (and remember, the economy in 2019 was very strong), while supply has still not recovered.
Q: How long will the rise in inflation last?
Swanson: This is the million dollar question that everyone wants to know the answer to. The Federal Reserve and Treasury have argued that the rise in inflation is temporary, but “temporary” can still mean a few years. The good news is that inflation should gradually ease as supply chain issues resolve. The bad news is that it looks like it will take several months for these supply chain issues to go away. Also, inflation tends to have some momentum, so even when the supply chain issues are resolved, it will still take several months for inflation to fully stabilize. Thus, I would expect inflation to decline gradually over time from its current level, but not return to its previous low level until 2023 or 2024.
Schwarz: One of the issues is that many of the places where we’re seeing the biggest price increases are taking a long time to fix. If we think of computer chips, a new chip factory takes two to three years to build. New housing estates are also not quick to build. People – one of the things we miss the most – take a long time to craft. As I joked recently, I didn’t do well in biology, but it takes about 22 years and 9 months to make another 22 year old worker. These issues will take time to resolve, which is why “transitional” inflation forecasts do not hold.
Q: What should be done to curb inflation?
Schwarz: Honestly, not much will stop him in the short term. As mentioned, many supply issues will take time to resolve. The extra fiscal stimulus won’t help either. Really, the only way to slow inflation at this point is to try to limit demand, i.e. slow down the economy. The Fed could raise interest rates in an attempt to slow the economy.
Swanson: The main thing is for supply to return to its pre-pandemic trend. Lockdowns in Europe and Asia must end, and the United States must allocate more workers to trucking and transportation, which are currently experiencing labor shortages contributing to the backlog at ports. Improved productivity, for example through increased automation and efficiency throughout the supply chain, could also help. An alternative approach would be for the Federal Reserve to reduce consumer demand by raising interest rates. The Fed has been reluctant to do so so far, but is widely expected to start raising rates in 2022.
Q: What’s on the horizon for our economy? Is there anything we need to worry about next?
Swanson: Interest rates are currently near all-time lows, and they are expected to rise over the next few years as the Fed reverses the very accommodative monetary policy it implemented during the pandemic. Many asset prices (such as housing and stocks) benefit from low interest rates, so going forward, rising interest rates will put pressure on these assets. People should be aware that house and stock prices do not rise every year, and there could be some market volatility as interest rates rise.
Schwarz: Inflation is probably the thing to watch. If inflation stays high or rises – now that it has become a bit of a political issue – the Fed will have to raise rates, which will slow the economy. People will start to use the term “stagflation”, meaning low growth or a recession with a lot of inflation. If inflation slows on its own, the Fed can wait and the economy can continue to get strong support from the Fed. At this point, I’ll bet on the former.
Also, I’m concerned that some of the asset markets (i.e. stocks, crypto) are in a bubble – or at least some parts are – and it’s starting to affect the market. real economy. If so, it could also lead to a recession down the road.