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Government Spending Creates Untethered Inflation
I n 2022, inflation has reared its ugly head. In April last year, the consumer price index (CPI) topped four percent on an annual basis for the first time in decades. Fed Chair- man Powell told us that inflation was “transitory.” But as the months dragged on, the price increases became more widespread. Housing prices, whether rental or for purchase, accelerated. And even if you aren’t looking for a new place to live, it is hard to miss the increase in food and energy prices. Wages have acceler- ated in 2022, though as a whole not as quickly as the general price level. By June, annual CPI growth exceeded nine percent. How did we get here, and what are the implications going forward?
Coming into 2021, COVID disruptions were impacting our ability to obtain goods and services. But supply chains were broken at a fundamental level. COVID merely exposed this. Trans- portation systems were also broken. A growing labor shortage was exacer- bated by accelerated retirements and government incentives not to work. Droughts, COVID-related shutdowns in China, and a war in Europe all worked to make the supply situation worse. Meanwhile, overall govern- ment spending quickly exceeded pre-COVID levels. Where did people get the money to spend? First, consumers were generally in good shape going into the COVID shutdowns. Then the government poured money into
individuals’ and businesses’ collec- tive pockets. Hello, Biden admin- istration — the solution to supply disruptions and shortages is not to spend trillions to stimulate demand! But the Biden administration didn’t just spend. It also restricted supply through a heavy-handed regulatory policy. As an example, the adminis- tration has sent a powerful message to energy companies and investors that has discouraged investment in supply. The results can be seen at the gas pump. To sum up the situation, there’s too much money chasing restricted supply. The Fed belatedly recog- nized this and is now attempting to squeeze the money supply to tamp down demand. We’ve seen the first continued on page 16
ŏĊ • AMAC Magazine
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