We all must understand today’s inflation

The United States inflation rate surged to a new four-decade high of 8.5% in March, a 40-year record that has only continued to rise. Purported causes are myriad: supply-chain issues persist, consumer demand soars — thanks to pandemic-era savings —and war in Ukraine rages on.

To borrow from Milton Friedman, “inflation is always and everywhere a monetary phenomenon.” Essentially, inflation cannot occur without being a direct result of the central bank’s monetary policy. A country’s federal bank effectively acts as a stabilizer for its economy, harnessing enacted interest rates to control both unemployment and price levels. 

In reality, then, to analyze U.S. inflation, we both start and end with the actions of the Federal Reserve — commonly known as the “Fed.” Given that Americans live in a republic, it is crucial to understand the root causes of economic problems — a democracy’s strength depends on its populace’s knowledge. So what has the U.S. government done wrong?

The initial culprit for today’s mass inflation was most likely the trillions of dollars worth of stimulus checks distributed by the U.S. Department of the Treasury amid the recession during the pandemic. Of course, this relief was absolutely necessary after millions of Americans lost their jobs in 2020. 

A Pew Research Center survey found that as high as about one in four adults had trouble paying bills in the months following the onslaught of the pandemic. Yet the relief packages failed to prevent low-income Americans from bearing the brunt of the pandemic’s economic carnage regardless. With such a drastic increase in the money supply, the Fed needed to take more action to prevent an inevitable inflation. 

Under current chair Jerome Powell, the Fed has largely eschewed tight-money policies, until now. Tight monetary policy refers to the policy that “cools down” an overheated economy, using high interest rates to minorly reduce economic growth but ultimately stabilize price increases. 

For the first time since 2018, the federal funds rate was increased two months ago. Having been near zero prior, the interest rate is now in a range between 0.25% and 0.5%, with plans for it to be gradually increased to roughly 2% by the end of 2022. For frame of reference, an interest rate of near 0% is an example of easy monetary policy, meaning it cultivates economic expansion but fails to regulate prices. Powell begrudgingly conceded that the believed narrative of supply chain improvements soon cooling inflation has “already fallen apart.” 

But many critics feel this response to what was called “transitory” inflation is long overdue. With interest rates now set to face a steady series of increases, economic growth will be hindered. Now, recession feels imminent to many Americans. How worried should we be? 

Perhaps the most apt comparison to make comes from the last time inflation was this high: 1982, during Ronald Reagan’s first term as president. After the 1970s were marred by stagflation — a term referring to when slowed economic growth, high unemployment and a high inflation rate all coincide — Jimmy Carter appointed Paul Volcker as Chair of the Federal Reserve. As inflation persisted through 1981, pressure on both the Reagan administration and the Fed mounted. Volker took drastic action, with interest rates eventually reaching as high as almost 20%. 

The U.S. economy went into recession, but by the end of 1982, inflation was below 5%. The economy proceeded to enjoy a prosperous expansion lasting into 1990. Could a similar fairy tale ending be in the cards for Biden, Powell and the U.S.?

The short answer is no; the long answer is even darker. Even if we avoid a recession, the U.S. economy currently faces problems so deeply entrenched that there isn’t any truly happy ending in sight. U.S. national debt recently topped $30 trillion, over 140% of the size of our total economy. 

Income inequality continues to skyrocket. Even before the pandemic, the richest quintile of households already made over 50% of the country’s total income. This problem has since only been exacerbated further: between Q4 2019 and Q1 2021, the net worth of the country’s 1% went up 23.1%, while the net worth of the country’s bottom 20% earners only went up 2.5%. 

Even with a properly executed response to a recession, there are many Americans who would still endure disastrous and lasting consequences — for example, university students who will be entering the job market for the first time. So while some prefer to remain ignorant of the behavior of the Federal Reserve, it is our duty more than ever to be vigilant. As bleak as it may be to say, there is a lot more than just gas prices to worry about.