Economists Can’t Agree On The Major Cause of Inflation

Even as Americans continue to experience higher prices, experts remain divided as to what the major cause of inflation is. Until now, many economists field conflicting views on what is driving up prices of goods and services.

RELATED: January Inflation Rate Hits 7.5%, Sets New 40-Year Record High

Is the Pandemic The Major Cause of Inflation?

Apart from differing viewpoints on the major cause of inflation, experts are also wondering when the upward trend will end. Currently, US inflation is at a record 40-year high.

Many Americans would like to know the exact reason why inflation continues to go higher. Many blame the pandemic for shutting down many businesses.

However, finding out what exactly is putting pressure on the dollar’s purchasing power remains elusive. 

Among the suspects are supply chain issues, increased demand, higher production costs, and the flood of relief money.

In addition, politics is also convincing followers to blame the $1.9 trillion American Rescue Plan of 2021 as the major cause of inflation. For political economists, they can safely say that all factors play a role in higher prices of goods.  

Confluence of Factors

David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy, agrees that many reasons are in play. “There’s a confluence of factors — it’s both. There’s a lot of things that pushed up demand,” he said. At the same time, “a lot that’s kept supply from responding accordingly, as a result, we have inflation.”

Wessel also said that demand during the pandemic surged because of aggressive monetary policies. For COVID, this meant a flood of money that reached epic proportions.

During the Obama administration, the stimulus package to aid the 2008 recession totaled $787 billion. For the coronavirus pandemic, the Trump and Biden administrations collectively released around $5 trillion. 

Supply Chain Remains Problematic

That huge flood of stimulus money helped create demand for American goods and services. However, the businesses that supplied the goods ran into trouble keeping up with demand.

Even as too much money became available, Wessel said the government’s response was necessary. 

Meanwhile, Dean Baker, co-founder of the Center for Economic and Policy Research, agrees that the stimulus aid helped in the recovery.

However, while the relief money had a positive effect on the economy, Americans focused on buying products rather than services. These purchases of couches, cars, cycles, and computers drove up demand.

Meanwhile, the supply chain remained hampered with raw material and delivery issues. “I see it as secondary,” Baker said, “but there’s no doubt it was a factor in driving inflation.”

Biden Overheated The Economy

Other experts believe that President Joe Biden overheated the economy as he ignored signs of recovery. Brian Reid, a senior fellow at the Manhattan Institute, believed the federal government overreacted.

“Fiscal policy has been extraordinarily aggressive, and the main example was the American Rescue Plan that was enacted last March,” he said. The government “shot a $1.9 trillion bazooka into a $420 billion output gap,” he noted. 

However, the current administration insists that the American Rescue Plan did not drive up inflation. Instead, it said that supply chain problems drove up prices as demand outpaces supply.

The White House also noted that other countries are facing similar inflation problems. It concluded that the current problem is not an issue of policy.

Instead, it’s a collective reality many countries face because of the pandemic. 

Watch the PBS NewsHour reporting on what's driving US inflation and how price pressures could be reduced:

What do you think is the main cause of inflation?

Please Select One:

• Supply chain problems. Demand exceeded supply as manufacturers had trouble producing enough goods.
• An overheated economy. The Biden administration flooded money even as businesses had limited capacity to fulfill orders.
• The pandemic. COVID limited business output even as it decimated the workforce.
• All factors played a major role in raising prices for goods and services.

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What do you think is the main cause of inflation in the United States? Do you agree that the government botched the recovery program by flooding money? Or, do you think supply chain issues limit the availability of goods?

Tell us what you think. Share your comments below.