Inflationary pressures and inflation are not the same
Contrary to recent reports, the present inflationary pressures on the U.S. economy will not metamorphose into wide-spread inflation in the foreseeable future, as they will be mitigated by the slack in the labor market, the Federal Reserve Board, the Department of Treasury and by cheaper imports.
In fact, the inflationary pressures of the past few months are normal, even beneficial, in view of the fact that the economy declined by 3.5 percent in 2020.
There is no question that the U.S. economy has been experiencing upward price pressures in 2021. For the year ending in March 2021, the inflation rate was 2.6 percent — much higher than the 1.6 percent for the year ending February 2021. Furthermore, the Consumer Price Index in March 2021 was 0.6 percent, or 7.2 percent annualized. Viewed through this prism, inflation seems like a run-away train.
But viewed with a wider lens, the picture is drastically different. The average annual inflation rate in 2017-2020 was 1.9 percent — well within the acceptable range of the Federal Reserve Board. (It was 1.4 percent in 2020, 2.3 percent in 2019, 1.9 percent in 2018 and 2.1 percent in 2017.)
The sudden and significant inflation uptick of 0.6 percent in March 2021, which amounts to an annualized 7.2 percent, is an organic result of an economy waking from the semi-dormant state of the pandemic, when inflation was 0.1 percent and unemployment 13.3 percent in May 2020.
Today’s high inflation rate will be moderated by several factors. First, upward pressure on many prices will diminish as the economy returns to operate under the normal forces of supply and demand — not those induced by the pandemic or by the administration’s monetary distributions to consumers to increase their demand for products and services.
Second, persistent high prices would increase demand for labor to produce products and services in high demand, thus dampening upward price pressures. Presently, there are 9.7 million unemployed people in the U.S. who could be utilized in this way.
Third, imports from many countries with weaker economies, experiencing recessionary pressures, would help control inflationary forces in the U.S.
Finally, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen have proven experience addressing monetary and fiscal policies to control inflation. They are fully aware and ready to respond to any danger of prolonged pressure on prices. Further, Powell and Yellen seem to see eye to eye in this matter, which may assure a timely and coordinated response, should inflationary forces become harmful.
A useful way to look at this is to analyze price changes by sector or industry. For example, while the lumber and steel industries are experiencing high demand and rising prices, others like travel and hospitality are experiencing low demand and tame prices. Yet demand for other products and services, such as armored vehicle manufacturing and oil pipeline transportation sanitizers, is declining.
For example, hand sanitizers – in short supply only a few months ago – are now widely available at cut-rate prices at dollar stores. This suggest that some of the past higher prices for products like hand sanitizers are transitory, and some high prices for products like lumber and steel are here to stay for some time, while the cost of a hotel stay may firm up as the economy continues to open.
All in all, however, some of the inflationary pressures being reflected in the American economy are beneficial, because they keep the supply chain humming, the demand for labor growing and, as a result, the economy on surer footing. And if this would result in a somewhat higher annualized inflation rate of say 3-4 percent for some time, then it would be a sign that the economy is doing well and that the Fed and Treasury may be contemplating appropriate action. This, however, is not likely to materialize in the near future.
For these reasons, recent alarms that inflation is taking hold of the U.S. economy and, therefore, that it is time for Powell to raise the discount rate and for Yellen to reduce demand are premature and misguided.
The American economy is healthy and growing. The present inflationary forces would only help it continue to grow and employ more of the unemployed.
Avraham Shama is the former dean of the College of Business at the University of Texas, The Pan-American. He is a professor at the Anderson School of Management at the University of New Mexico. He has published a book about stagflation and his new book,“The Dawn of Cyberwars,” is forthcoming.