Economic experts are pointing to high consumer spending as the main factor driving inflation up. The increased demand for products met with low supplies is keeping prices high. In the meantime, the ongoing war in Ukraine is also helping push oil and food prices up.
Consumer Spending is Pushing Inflation Rates Up
According to economists who spoke with ABC News, inflation will persist for the next few months. Unfortunately, the government only has limited means to control inflation. In addition, consumer spending is the main driving force behind inflation.
Traditionally, consumers spend money on services. However, the pandemic shifted consumer focus to goods instead.
Stacey Tisdale, the founder of Mind Money Media, said that manufacturers couldn’t keep up with the demand.
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“You saw the challenges that manufacturers were having, because of COVID, then you saw the supply chain disruptions. And that’s kind of what’s underpinning all of this,” she said. As a result, unmet strong demand led to an increase in prices.
Stimulus Money Boosted Consumer Spending
Jason Furman, a Harvard professor, and former Obama economic advisor noted that consumers had lots of money at the time.
The “biggest factor driving up inflation has been extraordinarily strong demand,” he said. Consumers saved more money in their accounts as they didn’t spend much in 2020.
In case they needed more money, banks were willing to give out loans with low-interest rates. Now, that demand became exacerbated due to higher oil prices when Russia invaded Ukraine.
Meanwhile, David Wessel of the Hutchins Center on Fiscal and Monetary Policy at Brookings pointed at stimulus money. He said that stimulus money fueled much of the economic activity during the pandemic.
In particular, he pointed to “the American Rescue Plan in early 2021, giving everybody $1,400”. Wessel also noted that in hindsight, “we probably put too much money in people’s pockets — they want to spend it.”
US Had More Inflation Because They Sent Out More Money
Wessel added that the economy was unable to address the rapid increase in demand. Fiscal stimulus plus the fact that people started relaxing about COVID led to this demand.
Furman also noted that US inflation is compared to other developed nations. That’s because of stimulus funds from the government, at least in part.
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“The United States has more inflation than any other major advanced economy. Probably because we’ve had a larger fiscal response. No other countries sent out checks on the scale that we did,” Furman said.
Other experts agreed that stimulus payments helped push consumer spending, which made inflation worse. However, some did not believe that mass payouts were the only cause.
The US government issued three rounds of stimulus checks to Americans during the time. Dean Baker, the senior economist of the Center for Economic and Policy Research, said other countries also experienced inflation.
He said that European countries are looking at 7.5% inflation rates, but they never gave out money.
Government Can Only Do So Much
As consumer spending is spurring inflation levels to record levels, experts say the government can’t do much about it.
However, they all agreed that the Federal Reserve’s move to raise interest rates is a step in the right direction. “The main thing is for the Fed to raise interest rates, and to start selling off assets.
The goal of that is to make it more expensive to borrow money,” Furman said. Consumers need to hold off buying a house or a car, while businesses need to pause expansion plans.
If this happens, the economy will cool down. Once economic growth slows down, inflation will slow down as well. However, “how much it does any of those is incredibly uncertain,” Furman surmised.
Watch the Bloomberg Markets and Finance video reporting that Consumers Keep Spending Despite Rising Inflation:
Do you agree that consumer spending is driving up inflation? Do you also agree that excessive stimulus spending pushed consumer demand and helped cause inflation?
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