Don’t blame Democrats for worldwide inflation
I read with interest Anthony O’Brien’s recent article, “Bad government policy, not corporate greed is responsible for inflation” (The Morning Call, May 18). O’Brien attributes the current bout of inflation to two factors: Biden’s American Rescue Plan and the Fed’s slowness in reacting to inflationary pressures.
Certainly, these aspects are relevant. However, the op-ed fails to mention that there were several rounds of economic stimulus bills totaling some $5.74 trillion, $3.84 trillion under Donald Trump and $1.9 trillion under Biden (USA Today March 11, 2021). All these bills were enacted within a one-year period. Consequently, any attempt to assign responsibility for inflation to any one administration seems futile. If anything, one could say that two-thirds can be assigned to Trump and one-third to Biden.
Some economists might argue the last additional stimulus (the one under Biden) triggered the inflation. That might have been the case if the economy had been operating at full tilt during the pandemic. However, similar to what occurred after World War
II, when COVID restrictions were relaxed, cumulative savings and the attendant pent-up demand were suddenly unleashed on an economy that was not able to respond on the supply side.
The inevitable result has been increased prices.
The editorial asserts that businesses are merely covering costs and essentially are innocent of any price gouging. If businesses are merely covering their (increased) costs, why are corporate profits at a record high?
Assuming comparable operating levels, increased sales revenue affects one of two items: (1) it either goes toward covering increased costs or (2) contributes to additional profits. Are companies taking advantage of the current situation by raising prices by more than the increase in costs and therefore padding profits?
According to the Wall Street Journal (“What Does Inflation Mean for American Businesses,” Nov. 15, 2021) nearly two-thirds of the biggest U.S. publicly traded
companies reported higher profit margins in 2021. One hundred of the largest companies reported profit margins that were at least 50% higher than 2019, as inflation in October 2021 hit a 31-year high.
Companies such as mattress maker Sleep Number Corp. and heating and cooling equipment manufacturer Carrier Global Corp. pushed through several price increase in 2021.
Ametek, a manufacturer of industrial instruments, indicated its price increases more than offset cost increases. CEO David Zapico stated in a conference call that, “We’re going to stay up ahead of inflation, and I expect that to be true next year.” Many CEOs indicated they are staying ahead of the inflation curve.
Most importantly, this current bout of inflation is not confined to the United States; it’s a worldwide phenomenon. As of May
27, inflation ranged from 2.5% in
Japan (2019 inflation: 0.8%) to 12.1% in Brazil (2019 inflation: 4.3%). Germany’s rate was 7.4% (2019 inflation: .5%), Sweden’s 6.4% (2019 inflation: .8%), and the U.S. inflation rate was 8.3% (2019 inflation: 2.3%). The U.S. is being buffeted by many factors beyond its borders that are causing inflation in the country.
On the demand side is (1) the global fiscal stimulus that added to savings and (2) the pent-up demand unleashed after COVID restrictions were relaxed. Developed countries cumulatively spent huge sums on COVID relief through various measures, including direct injections of funds into the economy, wage subsidies, and/ or business grants and loans. For example, as a percentage of gross domestic product, Japan’s stimulus was 42.2%; Brazil’s was 12%; Germany 20.3%; Sweden 20.9%; and the U.S. 18.3%. At 18.3% of GDP, the stimulus enacted by the
United States is in line with other countries and by no means the highest.
On the supply side, unprecedented dynamics arising from the pandemic and the war in Ukraine have affected the global economy, triggering both U.S. and worldwide inflation. These events include:
1. The supply-chain crisis following the lifting of COVID restrictions. The delays hobbled the ability to supply many products on a timely basis.
2. Lockdowns idling Chinese factories.
3. Labor shortages, partially affected by immigration restrictions, have contributed to a wage spiral.
4. The war in Ukraine restricted world food production. For example, before the war, Russia and the Ukraine supplied 30% of global exports of wheat and a high percentage of other grains, such as
barley and corn.
5. Sanctions on the Russian economy have severely affected world energy prices. Russia is the third largest oil producer behind Saudi Arabia and the United States.
The stimulus enacted by the United States is not excessive when compared with other countries. I would characterize the supply-side factors as being the more significant culprits responsible for the inflation we are experiencing.
In short, the injections of money into the world economy by the U.S. and other developed countries, the ensuing release of pent-up demand after the easing of COVID restrictions and, in particular, the unprecedented supply-side constraints, have created a perfect storm resulting in both U.S. and global inflation.