What are the causes of inflation in the US?

You’ll notice there isn’t one simple answer…but unfortunately that’s what a lot of folks would like — and certainly what political pundits and talkshow hosts are willing to sell us. :-(

Recent causes for inflation in the U.S. — really none of which can be “blamed” on any one political party or candidate — include:

1) Government stimulus spending during the COVID pandemic. This put more $$ in people’s hands to spend and many of them did.

2) Reluctance of Federal Reserve to address inflation sooner. Many influential economists (and folks in Fed itself) believed initial spikes of inflation were “transitory.” But they were wrong.

3) Russian aggression against Ukraine and consequent sanctions. The war itself was hugely disruptive to supplies of everything from oil and natural gas to grain, palladium (used in fuel cells and catalytic converters) and potash (a component of fertilizer production) — and the sanctions levied against Russia then amplified this effect.

4) Supply chain and transport problems around the globe. In addition to the war in Ukraine, a lot of this of this was COVID-related on a global scale, but some of it was also more localized. For example, there were oil refinery problems in the U.S. that added to oil production woes, a particular region of China that couldn’t produce microchips for several months, etc. Regardless, even as demand ramped up, supply chains remained choked…and many of those conditions continue to persist.

5) Pent up demand during COVID. This is actually a biggie, because that pent up demand is still in play — folks are still spending gobs of $$$ on things they couldn’t do during the pandemic, like travel and eating out.

6) Conspiracy thinking. This is actually a pretty nasty feature of U.S. culture that is really hurting the U.S. economy. As just one example, the resistance to COVID vaccination was really, really stupid and probably prolonged the negative economic impacts of COVID on the U.S. economy — and extended all COVID-related inflationary factors — for many more months than necessary.

7) Global economic shifts and expanding excessive consumption. Some twenty years ago the U.S. was able to source really cheap labor and raw materials from developing countries like China, Korea, India, etc. This resulted in much cheaper prices for U.S. consumers. But, as a consequence, Americans who make up only 5% of the global population were using some 50% of global resources. But now, the economies of the developing world have grown tremendously, and billions of their citizens are now much wealthier and expect a higher standard of living — along with higher wages. And of course those new consumers now have need of those same resources that were previously dedicated to supplying goods to Americans. Add to this that, globally, those raw materials are becoming more scarce even as demand for them grows around the globe. So…do you see the problem here? Americans can no longer expect cheap goods from China in particular the way they once did…so prices would have risen in the U.S. regardless of any of the other factors listed here. And the cost of doing business in the U.S. is just rising…period. Developing countries aren’t even willing to buy our garbage anymore! So guess who has to pay more for dealing with that garbage? We do.

8-) Anti-immigrant policies and sentiment in the U.S.. This is actually one of the dumbest “let’s shoot ourselves in the foot” developments in American politics. Blaming immigrants for our problems isn’t just mistaken, it’s really harmful to the U.S. economy. Particularly in agriculture, the U.S. relies almost entirely on immigrant workers to keep Americans fed…and big ag really has never cared if those workers were legal or not. So when politicians amplify fear over a “crisis at the border” and enact policies that keep immigrants from supplying U.S. companies with much-needed cheap labor, guess who pays the price? American consumers of course.

9) OPEC oil production policies. On the heals of oil sanctions against Russia, OPEC’s decision to cut back production was a really, really bad idea — basically a “punch in the gut” to the global economy at the worst possible time.

10) Corporate greed. This includes things like reluctance of banks to pass on increased interest rates to consumers. You may have noticed that mortgage lenders are happy to charge 7%+ on 30-year mortgages, but savings accounts in banks are still only providing less than an unchanged 1% interest. Then you have oil companies raking in ridiculously high profits (the highest in their entire history!) just because they can. This level of greed has plagued corporate America for a long time, but it seems particularly bad right now. And of course it’s not restricted to the U.S. And all of this opportunistic greed is what’s helping make prices on everything very high…and likely will keep those prices from going down even when all of the other inflationary pressures are relieved.

11) Labor shortages and consequent increases in salary. This has been falsely blamed on COVID stimulus and folks choosing not to work because they were receiving COVID relief and unemployment benefits. In reality, this is a much more complicated situation that involves a host of factors — things like folks leaving the workforce due to burnout (especially among what we discovered to be “essential workers” during COVID), early retirement, a sea change in attitudes about work commitment (i.e. “the great resignation” and other gen z attitude shifts), worker deaths and disability from COVID, and major career path shifts due to COVID impacts on certain industries (for example, restaurant workers who were laid off during COVID choosing new careers).

12) Some unfortunately timed fulfillments of campaign promises. On one side, student loan forgiveness could likely become an inflation stimulator if those are allowed to proceed. On the other side, any and all tax cuts have almost certainly helped induce inflation. Here we really can blame the politicians on both the Left and the Right…even though they are just following through on their campaign promises to voters.

13) Financial “psychologics” that are disconnected from reality. This is more subtle, but the U.S. stock market is a very good example. As a consequence of both institutional “build it and they will come” optimism and a huge spike in irrationally exuberant retail investors, the stock market has almost zero correlation with real-world economic indicators. This has been a long-term problem for sure, but essentially the opportunity to make a lot of money in speculative investing, which in turn supercharges valuation and reduces perceived risk, leads to everyone (consumers, corporations, government agencies, etc.) operating as if everything is golden and wonderful…when really the Emperor isn’t wearing any clothes (or is wearing moldy rags…!). This false optimism and misplaced enthusiasm actually places a lot of upward pressure on everything from consumer prices to worker salaries, even as it encourages company’s to spend gobs of money because, well, they falsely believe in their own inflated valuation. It’s a pretty nasty cycle!

There are additional factors (after I finished writing this post I realized several more that should have been included) but this captures some pretty substantive issues. And, as you can see, we can’t really pin things on any one thing. It’s complicated. And we certainly can’t blame any one party or individual political leaders for inflation. That’s just a really ignorant knee-jerk response out fear and frustration.

My 2 cents.


Trackback specific URI for this entry

This link is not meant to be clicked. It contains the trackback URI for this entry. You can use this URI to send ping- & trackbacks from your own blog to this entry. To copy the link, right click and select "Copy Shortcut" in Internet Explorer or "Copy Link Location" in Mozilla.

No Trackbacks


Display comments as Linear | Threaded

No comments

The author does not allow comments to this entry