Far from signaling the return of significant inflation, temporary price increases are exactly what one would expect in a recovery following an economic shutdown. Whether those peddling inflation fears are pursuing their own agenda or simply jumping the gun, they should not be heeded.
NEW YORK – Slight increases in the rate of inflation in the United States and Europe have triggered financial-market anxieties. Has US President Joe Biden’s administration risked overheating the economy with its $1.9 trillion rescue package and plans for additional spending to invest in infrastructure, job creation, and bolstering American families?
Such concerns are premature, considering the deep uncertainty we still face. We have never before experienced a pandemic-induced downturn featuring a disproportionately steep service-sector recession, unprecedented increases in inequality, and soaring savings rates. No one even knows if or when COVID-19 will be contained in the advanced economies, let alone globally. While weighing the risks, we also must plan for all contingencies. In my view, the Biden administration has correctly determined that the risks of doing too little far outweigh the risks of doing too much.
Moreover, much of the current inflationary pressure stems from short-term supply-side bottlenecks, which are inevitable when restarting an economy that has been temporarily shut down. We don’t lack the global capacity to build cars or semiconductors; but when all new cars use semiconductors, and demand for cars is mired in uncertainty (as it was during the pandemic), production of semiconductors will be curtailed. More broadly, coordinating all production inputs across a complex integrated global economy is an enormously difficult task that we usually take for granted because things work so well, and because most adjustments are “on the margin.”
Now that the normal process has been interrupted, there will be hiccups, and these will translate into price increases for one product or the other. But there is no reason to believe that these movements will fuel inflation expectations and thus generate inflationary momentum, especially given the overall excess capacity around the world. It is worth remembering just how recently some of those who are now warning about inflation from excessive demand were talking about “secular stagnation” born of insufficient aggregate demand (even at a zero interest rate).
In a country with deep, longstanding inequalities that have been exposed and exacerbated by the pandemic, a tight labor market is just what the doctor ordered. When the demand for labor is strong, wages at the bottom rise and marginalized groups are brought into the labor market. Of course, the exact tightness of the current US labor market is a matter of some debate, given reports of labor shortages despite employment remaining markedly below its pre-crisis level.