Inflation and Biden's Spending Package

Story by: Sean Mirza

Visuals by: Noah Weinberg

Date: 7/14/21

Inflation is upon us. Over the past few months, it has stealthily crept up on the American consumer in many different markets. As of mid May, food prices experienced an yearly increase of 2.4%. In the same time frame, used cars have increased in price 21%, including a sharp 10% increase in the month of April alone. Today, prices are about 5% higher than they were a year ago. Such a rate has been the highest since August of 2008.

kia telluride image for vistory inflation Story

The average price of a used Kia Telluride is 8.1% higher than the average price of a new one.

The causes of inflation today are closely tied to the ongoing COVID-19 pandemic. When the virus exploded in March of 2020, the entire global economy shut down almost overnight. Factories closed down, unemployment levels soared, and the virus’ hindrance to human interaction led to a drastic decrease in basic economic activity. Subsequently, a number of companies put a hiatus to their operation because people just didn't have needs for, or couldn't afford, a lot of commodities which they could previously.

A year and some months later, this dormant situation took a reverse turn in America. Vaccines are widespread, and states have vastly reduced, or all together eliminated, COVID related restrictions. We have ignited our economy back on. Economists Andrew Husby and Yelena Shulyayeva described the inflation we are experiencing today as an inevitable “consequence of reopening”. While we have never seen such a rapid increase in spending, it is understandable given the circumstances. Further, it is logical that such a rapid increase would be accompanied by considerable inflation.

The bigger problem is that producers are struggling to keep up. It is very difficult for producers to meet this sudden and massive demand because there is a labor shortage. To put it simply, there are not nearly enough people willing to work at currently set wages. This forces employers to raise wages, and pass these added costs onto consumers by raising prices for goods and services. Thus, we have inflation. This labor shortage is present in virtually every industry, which is why there have been price hikes in such a wide degree of products and services. Food services companies like Darden Restaurants, owner of Olive Garden, stated in June that labor and commodity costs are up 6% and 2.5% respectively. CPG companies like General Mills, manufacturer of Cheerios and Betty Crocker, anticipates input cost inflation of 7% for the current fiscal year.

Limited supply of semiconductors for new cars has led to the aforementioned extreme price hikes in used vehicles. Bloomberg reports that a third of all non factory companies in the entirety of the Philadelphia Fed district have had increased signing costs and bonuses for employees. This inflation has become virtually ubiquitous in any region, industry or commodity, and people have started to wonder the specific measures the Biden administration plans on taking.

mcdonalds pay raise advertisement image for vistory inflation Story

In May, a McDonalds in Tampa, Florida offered a starting wage $4.35 over minimum wage, yet still struggled to find employees.

While American consumers are worrying about their increased cost of living, however, neither the federal government nor the federal reserve has shown much concern. For the entire year, Jerome Powell has aired the message that increases in prices are temporary and due to the reopening of the economy. He cites supply chain issues as the driving force, but claims that these will inevitably ease as the labor market restores to its pre-pandemic numbers.

It is also important to remember that some small amount of inflation will always be present in a healthy economy. The Federal Reserve has targeted 2 percent inflation as a long term benchmark. At the end of April, Powell claimed that he does not expect inflation to move “materially above 2 percent in a persistent way”. At the same time he boasted that the federal government both has and is prepared to use the necessary tools to curb inflation if it does move above such a figure. Overall, his message is clear: don't panic because this will pass soon. However, in June, he admitted to the possibility that inflation could end up higher and “more persistent” than originally imagined. Critics of the Jerome Powell policy partially blame the Fed's current monetary policy for the inflation we are experiencing. While supply chain problems certainly are a driving factor, the federal reserve has been printing money at astronomically high rates. For reference, about 18% of all US dollars currently in circulation were made in 2020. Creating so much currency in such a short period of time is bound to trigger high inflation rates.

As a matter of practice, the Biden administration seems unconcerned with inflation for the time being. So much so that they are preparing trillions in spending packages to be used over the course of the decade, including a $1.2 trillion dollar bipartisan plan agreed to on June 24th. This package, along with hypothetical others in the future, will focus on American infrastructure, an underwhelming aspect for a first world country of its nature. Public transportation and railways lag behind other contemporary nations in Europe and Asia, even major roads and bridges are in need of repair or replacement. Infrastructure is a key to economic development, and improving ours would likely have large positive returns in the long term. Moody estimated that Biden's infrastructure package (then sized at $2.3 trillion) would create 2.6 million jobs over the course of a decade. This should provide excellent economic results if projections turn out to be true. However, critics argue that now is not the right time. The fact is that spending of this size will increase inflation to some extent, but the magnitude of such an increase cannot yet be accurately measured.

Republicans and monetary hawks have heavily criticized Biden and his administration for this increase in spending during a time of inflation. To them, Biden's spending, including a $1.9 trillion COVID relief bill passed only four months ago, has been seen as out of control and a step towards overheating the economy. Mitch McConell, leader of the Republican party, has warned that Biden's budget will “Drown American Families in … inflation”.

jerome powell image for vistory article on inflation

Jerome Powell has been Chair of the Federal Reserve since February 2018. Since then, the Fed has printed more money than usual compared to historical trends, which should cause some inflation.

On the other side of the spectrum, liberal economists, such as Nobel laureate Joseph E Stiglitz, have assessed that the inflation rate will soon decrease as supply bottlenecks open up, and that the federal reserve has more than the arsenal it requires to fight sustained price increases in the instance in which they occur. Stiglitz also claimed that the long term inflation concern being raised by Republicans is a “red herring” being used to stymie the Biden administration's agenda. However, even some Democrats, such as the former Obama administration’s Director of the National Economic Council, Larry Summers, disagree with Biden’s policies. Summers has suggested that Biden slows stimulus and excess spending, a trajectory opposite to where the administration is currently heading.

Sources :

"Analysis: Why Republicans' main attack on Biden's infrastructure plan doesn't work"
"Larry Summers sends stark inflation warning to Joe Biden"
"Used cars, travel and furniture are just some of many things that are getting more expensive"
"Biden backs $1.2tn infrastructure bill but places big condition"
"AP FACT CHECK: Biden's job inflation on infrastructure"
"Does Joe Biden’s spending plan really risk high inflation?"
"Reports of labor shortage, inflation pose challenges for White House"
"McConnell: President Biden’s Budget “Would Drown American Families in Debt, Deficits, and Inflation"
"Inflation Eats at Surging U.S. Pay With Biden Plans at Stake"
Food and beverage giants sound inflation alarm"
"Bad News: Inflation Is Already Affecting Our Everyday Lives"
"McConnell lauds Bill Clinton's treasury secretary for hyperinflation warning"
"Used-Car Models That Are Now More Expensive Than They Were New"
"Value of the US dollar 1635-2020"
"Currency in Circulation"
"Lots of jobs, few hires: Labor shortage puts Tampa Bay restaurants in a pinch"