Economists: Supply-chain woes, pandemic drive recent price hikes

By: - December 20, 2021 7:00 am

(Engin Akyurt | Unsplash)

Inflation is back. But how bad is it? And why? And for how long?

The most common measure of inflation, the consumer price index, rose 6.8% in the 12 months that ended in November, according to the federal Bureau of Labor Statistics (BLS). That includes the cost of food and energy, both of which fluctuate much more than most other goods but are also much more visible to consumers. Leaving them out, the increase was a more modest 4.9%, still well ahead of the last decade or more.

The U.S. last experienced rampant inflation four decades ago. “We have very short memories,” says Steven Deller, an economist in the University of Wisconsin College of Agriculture & Life Sciences. “We don’t remember what it was like during the 1970s and early 80s, so this is unusual.”

The current spike isn’t imaginary. “It’s alarmingly high, and people are feeling it every month in their wallets and pocketbooks,” says Robert Frick, corporate economist for Navy Federal Credit Union. But Frick also believes it’s temporary. 

The 2021 price hikes are even more jarring after prices fell on some goods early in the COVID-19 pandemic and overall inflation shrank to 1%. “We’re comparing things to last year when the economy was really slow,” says James McGibany, who chairs the economics department at Marquette University.

Menzie Chinn

In a recent analysis, Menzie Chinn, an economist at the UW’s Robert M. La Follette School of Public Affairs, writes that inflation averaged just 1.7% in the last decade, at times “raising concerns that inflation was too low.”  

But while the current inflation might have first looked like the economy playing catch-up after prices tumbled early in the pandemic, it has since “overshot the trend,” Chinn adds. Big-ticket purchases — cars, appliances and other so-called durable goods — are showing the sharpest increases, Chinn writes on his blog Econbrowser. High real estate prices and rental costs have also been a factor.

Supply chain disruption

In short: There aren’t enough of some of the goods that a lot of people want, so they’ve become more expensive.

“Because the supply chain is so fundamentally messed up it’s causing shortages and it’s causing prices to go up,” Deller says.

Because the supply chain is so fundamentally messed up it’s causing shortages and it’s causing prices to go up.

– Steven Deller, UW economist

COVID-19 threw a monkey wrench in the gears of the worldwide system that moves goods from where they’re produced and packaged to where we buy them. For years manufacturers and retailers alike increasingly sourced goods globally, kept inventories low with just-in-time strategies and counted on the ability to replenish them frequently.

Robert Frick

“The supply chain had grown so fragile and so thin, in order to cut delivery prices and maximize efficiency, that when it got jammed up because of COVID it created a tangle,” Frick says. A spike in oil prices, which had plummeted with early pandemic lockdowns, added to the mix.

After dropping early in the pandemic, demand “came roaring back,” he adds. But the atrophied supply chain hasn’t caught up, and there have been further bubbles along the way. “Factories overseas have been hamstrung by waves of COVID,” says Frick. “The international supply chain is in a very delicate balance.”

Along with a surge in demand that producers couldn’t keep up with, bottlenecks in the shipment of goods have also played a role. Trucking companies complain they can’t find drivers, container ships are stuck in port waiting to be unloaded, says Deller.

“There’s not a lot of warehouse space,” says Frick. “You need a lot more rail lines going in and out of ports than we have.”

Kundan Kishor

Policymakers and economists weren’t expecting this. “They were blindsided by the supply side [crunch],” says Kundan Kishor, economics chair at the University of Wisconsin-Milwaukee.

“This is a surprise to everyone,” says Frick. “Six months ago, nobody thought that inflation was going to get this high for this long.”

The alternative: deeper recession?

Republican lawmakers and their allies are trying to pin the latest inflationary jump on President Joe Biden, the Democratic majority in Congress and the legislation they’ve passed: the American Rescue Plan Act (ARPA) COVID relief package as well as the recent bipartisan infrastructure program.

“Radical spending drove inflation to a 39-year high,” Rep. Mike Gallagher (R-Green Bay) charged in a press release issued Dec. 14 after the latest inflation numbers were released. In the statement, Gallagher also called on the Senate to scrap the second part of the Democrats’ agenda, the Build Back Better budget reconciliation bill.

There is a slight connection between inflation and some of the spending in ARPA — but only a slight one, says Chinn. The pandemic relief bill bolstered the purchasing power of households; households spent that money on goods. Supply chain disruptions have driven up the prices of those goods. 

But without that federal aid to households, “the situation would have been much worse,” says UWM’s Kishor. “The risk would have been that the recovery would have been slower” and the pandemic recession longer-lasting and more severe.

Steven Deller

“The alternative would have been, rather than a recession and some inflation coming out of it, it would have led to another Great Recession,” says Deller. “So what’s your poison? A little bit of upward pressure on prices, because of the supply chain and pent-up demand? Or really high unemployment” — crippling consumer spending in the process.

After the 2008 financial crisis, Kishor says, inflation stayed low, but jobs grew very slowly in the years that immediately followed “because the fiscal policy response was not aggressive enough.”

But both the recently enacted infrastructure legislation  and the Build Back Better plan still pending in the Senate are unlikely to fuel inflation, according to Chinn. That’s also the view of a majority of economists who responded to a survey published in early December.

“The infrastructure bill is too small in terms of spending to have any current impact,” says Chinn, “and unlikely to have much impact in subsequent years given how little is being spent in a given year.” The Build Back Better package could result in some short-term inflation, “but might actually lower inflation over the longer term.”

Looking ahead

Predictions for what’s to come are more mixed. Chinn notes that national surveys of households find people “seem to have a poor assessment of what actual current inflation is,” and that they also overestimate future inflation, “while surveys of professional forecasters were more accurate.”

Frick expects to see inflation moderate in the next six months. “There are signs — not just one or two, but half a dozen signs that the supply chain crisis is finally starting to ease,” he says. Oil prices are coming down as well, he observes. “Those things together certainly point to lower inflation by March or April.”

James McGibany

McGibany is warier. “I would say that this is going to be an issue for more than the next five to six months, and that’s going to be reflected in higher prices for a lot of things,” says the Marquette professor. On Dec. 15 the Federal Reserve indicated plans to begin raising interest rates in 2022, a sign, McGibany says, that the central bank is taking inflation concerns seriously.

The ultimate arbiter, however, is likely to be the pandemic.

“The sooner we can get through COVID and the sooner we can get supply chain issues resolved, the sooner we can be back to normal inflation,” says Deller.

“How many variations of COVID are we going to have? European countries are going back into lockdown — guess what that does? It screws up the supply chain some more.”

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Erik Gunn
Erik Gunn

Senior Reporter Erik Gunn reports and writes on work and the economy, health policy and related subjects, for the Wisconsin Examiner. He spent 24 years as a freelance writer for Milwaukee Magazine, Isthmus, The Progressive, BNA Inc., and other publications, winning awards for investigative reporting, feature writing, beat coverage, business writing, and commentary. An East Coast native, he previously covered labor for The Milwaukee Journal after reporting for newspapers in upstate New York and northern Illinois. He's a graduate of Beloit College (English Comp.) and the Columbia School of Journalism. Off hours he is the Examiner's resident Springsteen and Jackson Browne fanboy and model railroad nerd.

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