Page 26 - BusinessWest March 7, 2022

Inflation: It’s
Economics,
Not Politics
The Principles of Supply and
Demand Are Driving Prices
Skyward
By Jeff Liquori
In July 2021, the Bureau of Labor Statistics released an unusual piece of data: the average price of used cars and trucks had increased a whopping 42% over the previous year. Given the con-
straints in the supply chain, this extraordinary jump was dismissed as an aberration; in fact, the total increase in consumer prices that month was one of the sharpest in recent history. Interestingly, the consumer price index (CPI) category that had the second-largest uptick? Energy.
Energy is sensitive to inflation. Prices may experience higher volatility in the short term, but ultimately supply and demand is what drives the price. It’s surprising that investors and analysts did not pay more attention to these fundamental metrics at that time.
During the 2008-09 Great Financial Crisis, congress, passed two acts to rescue the financial system from near ruin, authorizing a total of $1.5 trillion in stimulus funds. Financial markets recovered and the economy expanded, albeit at a moderate pace. The first piece of legislation was at the end of Bush’s second term and the second passed two months into Obama’s first term.
Two years ago, the planet faced a crisis not seen since the 1918 influ- enza pandemic: COVID-19. To combat it, countries locked down, effec- tively grinding commerce to a halt. In response, Congress enacted nearly $2.5 trillion of stimulus assistance, and Federal Reserve banks used their monetary tools to make capital markets even more liquid. In the third week of March 2020, extreme investor panic caused stock prices to bot- tomout. ButthenAmericansstartedtospendagain,andinabigway.The economy strengthened quickly and by October the unemployment rate was approaching pre-Covid levels, at 5%, after skyrocketing to nearly 15% in April.
“The fundamentals of supply and demand will support the persistence of inflationary pressure, and the occupant of the White House, past or present, has little to do with that.”
Today, unemployment sits at 4% and inflation is running at a 4.8% annualized rate, the highest in three decades. The difference between 2020 and now is there are nearly 11 million open jobs, the most since
the Bureau of Labor Statistics started tracking the data. Rising wages and attractive benefits have failed to attract enough workers, and so the supply chain issues have gotten worse as jobs go unfilled.
This sharp increase in demand — due to a strong economy, massive stimulus, and unique constraints on global commerce — has put upward pressure on the prices of consumer goods. The price of oil provides an easy and familiar example. Notably, the cost to gas up our cars or heat our homes has soared dramatically. As oil prices increase, so does the cost of transport, which affects almost all consumer goods. Currently, a barrel of oil is $95.
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Blaming the White House for inflation is lazy. Macroeconom- ics are based on supply and
Inflation
Continued on page 31
26 MARCH 7, 2022
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