Economists: This Is What’s Driving Current Inflationary Pressures

Economists: This Is What’s Driving Current Inflationary Pressures

St. Louis Federal Reserve president James Bullard warned Thursday that without central bank action on interest rates, inflation could become an even more serious issue going forward.

Much to the dismay of already cash-strapped, pandemic-weary Americans, it was recently reported that the Consumer Price Index (CPI) surged 7.5 percent in January year-over-year—the fastest rate witnessed since way back in February 1982.

Then, not to be outdone, the Producer Price Index (PPI)—which tracks average price changes the country’s producers get paid for their goods and services over time—steadily climbed higher 9.7 percent over the same period.

Even with such data points in hand, though, there still appears to be disagreements over what exactly is driving these inflationary pressures. Is it the American Rescue Plan that approved another round of stimulus checks and the enhanced child tax credit? Or perhaps higher consumer demand amid the ongoing supply chain crisis?

"There’s a confluence of factors—it’s both,” David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, recently told NBC News.

"There’s a lot of things that pushed up demand and a lot that’s kept supply from responding accordingly, as a result we have inflation,” he continued.

Too Much Stimulus?

Wessel also noted that there is likely a link between surging demand and roughly $5 trillion worth of stimulus packages approved during the Trump and the Biden administrations.

Dean Baker, the co-founder of Center for Economic and Policy Research, said that the stimulus was necessary for the pandemic-hit economy, but it also propelled Americans to buy more products rather than services just as the supply chain was showing signs of fractures.

"I see it as secondary, but there’s no doubt it was a factor in driving inflation,” he told NBC.

Action Needed Now

Regardless of what’s exactly causing the higher prices, St. Louis Federal Reserve president James Bullard warned Thursday that without central bank action on interest rates, inflation could become an even more serious issue going forward.

"We’re at more risk now than we’ve been in a generation that this could get out of control,” he said during a panel talk at Columbia University, per CNBC.

"One scenario would be … a new surprise that hits us that we can’t anticipate right now, but we would have even more inflation. That’s the kind of situation that we want to … make sure it doesn’t occur,” he continued, adding that “there’s been too much emphasis and too much mindshare devoted to the idea that inflation will dissipate at some point in the future.”

Legendary investor Charlie Munger also recently weighed in on the high stakes that are at play amid the current high-inflationary environment.

"Inflation is a very serious subject, you could argue it is the way democracies die,” the ninety-eight-year-old vice chairman of Berkshire Hathaway told Yahoo Finance on Wednesday.

He also noted that it was only after years of inflation when “eventually the whole damn Roman Empire collapsed, so [the current situation] is the biggest long-range danger we have, apart from nuclear war.”

Ethen Kim Lieser is a Washington state-based Science and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn.

Image: Reuters