May 16, 2022

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What can the government do to stop or slow down inflation?

What can the government do to stop or slow down inflation?

The US inflation rate rose 8.5% in March, compared to the previous 12 months, marking the highest increase since 1981, according to the Consumer Price Index in the Ministry of Labor.

Between February and March, inflation rose by 1.2%, making Biggest monthly jump since 2005.

According to many economists and other financial experts, rising consumer demand in an economy – offset by a decrease in supply – is the main factor driving inflation. The war in Ukraine, they said, also led to higher prices, specifically oil and food prices.

And the government is constrained by intervention, according to experts who spoke to ABC News.

Experts also told ABC News that inflation is likely to be an issue in the coming months, with one even saying it expects it to continue for years.

The drivers of inflation

Consumers traditionally spend the bulk of their money on services, but during the pandemic, demand has shifted toward commodities, Stacy Tisdale, financial journalist and founder of Money media blocker ABC News said.

“I’ve seen this collapse, I’ve seen manufacturers are not able to keep up with that demand, I’ve seen the challenges that manufacturers are facing, because of COVID, and then I’ve seen supply chain disruptions. And that’s kind of what all of this is based on,” Tisdale said.

Experts said that the failure to meet strong consumer demand with adequate supplies, is the main driver of inflation.

“The biggest factor driving up inflation was unusually strong demand, consumers have more money in their bank accounts, lower interest rates to borrow at stronger stock prices and a lot more money they saved because they didn’t spend much in 2020, Jason Furman said, Professor of Practice at Harvard University and a former economic advisor to President Barack Obama who served as Chief Economist and Cabinet Member.

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“This has been exacerbated recently by things like rising oil prices due to [Russian President Vladimir] “Putin invaded Ukraine,” he added.

Some experts believe that the stimulus money has exacerbated rising demand.

“We pumped a lot of demand into the economy, especially the US bailout in early 2021, giving everyone $1,400,” said David Wessel, director of the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution.

“With hindsight, we may be putting a lot of money in people’s pockets – they want to spend it, but the supply side of the economy is not able to absorb the rapid increase in demand that is coming from fiscal stimulus and from the fact that people are starting to relax about the pandemic.”

Furman said inflation in the United States is worse than in other developed countries, in part due to stimulus money from the government.

“The United States has more inflation than any other advanced economy. Probably because we have a greater fiscal response. No other country has sent checks on the scale that we did,” Furman said.

Other experts agree that the stimulus payments contributed to inflation, but say the widely distributed payments are not the cause. The government distributed three rounds Checks for Americans During the pandemic as financial relief, hoping to boost the economy.

“You can certainly make the case … that the stimulus package certainly contributed to the inflation rate, but you didn’t have big stimulus packages in Europe. And they’re still looking at 7.5% inflation,” Dean Baker, a senior economist and co-founder of the Center for Economic Research said. and politics for ABC News.

Baker said Russia’s invasion of Ukraine has pushed gas prices “to an all-time high” and raised concerns about crops from Ukraine, a major global exporter of wheat.

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“There are real concerns that a lot of that will not be grown or cannot be exported. We have seen a huge rise in the price of wheat, and a number of other agricultural commodities in the past two months or so since the war.”

What can the government do?

With rising consumer demand as the main driver of inflation, experts said there’s not much the government can do to fight inflation, but they do agree that the Fed should raise interest rates.

“The main thing is for the Fed to raise interest rates, and start selling assets. The goal is to increase the cost of borrowing money to buy a house or a car, or to buy business plants and equipment. This will dampen demand in the economy, slow economic growth and slow inflation. “.

“How much it affects any of those is incredibly uncertain,” he added.

Becker agreed, saying that “the lack of interest makes no sense given the strength of the labor market.”

To help bring oil prices down, Baker said that if the government committed to supporting the oil market to some extent, it might encourage oil companies, burned by the 2014 oil price crash, to ramp up production faster.

“This is new enough in people’s minds that they are reluctant to go ahead and dig in. So one way to try to counter that is the Biden administration … can commit that it will support the market,” Becker said.

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Such a commitment, Baker said, would be that if oil prices fell below a certain level, the government would buy barrels to restock the strategic reserve, thus supporting oil prices.

Wessel suggested that the Biden administration could also cancel Tariffs in the Trump Erawhich may lead to lower import prices; Raising taxes or cutting spending to remove demand from the economy.

What will come?

Inflation may remain a problem for the coming months, but experts disagree on how long it could last.

“I saw some signs in [Consumer Price Index] This suggests that we may be past the worst, but I expect inflation to be high for at least another 18 to 24 months.”

Foreman said inflation could continue for years.

“Maybe some of the inflation is temporary. I don’t think the underlying real inflation rate in the economy is 8%. But it probably isn’t 2% either. And so inflation should start to come down a little bit, but it’s not likely to get anywhere near where the Fed wants it.” to come,” Foreman said.

“It could easily remain elevated for years to come. We could be lucky and they could all magically disappear.” [Or] We could have a slump, which could make it go away. I think the most likely scenario is that it continues for several years.”

“People should plan for higher interest rates, so things like mortgages and car loans are getting more expensive. They should plan for rates to stay high. However, they have to understand that it’s still a very strong job market. So there are a lot of business options out there,” Foreman said.