Part I of III on Inflation: Conservative Analysis of the Causes of the Current High Inflation

There are several causes of the current increased inflation, some of which are more significant contributors than others. Both liberal Democrats and Trumpist Republicans are engaging in opportunistic, populist politics by magnifying the blame on their opponents to promote their favored proposals. A conservative approach would be a more reasonable and effective solution. In this first post in a three-part series, I explain what inflation is and what effects it has economically and observe the causes of its current spike. In the second post, I examine the proposals offered by liberals and Trumpists and why they would not work or would even exacerbate the problem. In the third post, I offer conservative solutions. Inflation, which means increased prices for goods or services caused by more demand than supply, is generally economically harmful. It diminishes the value of people’s assets and income and is bad for lenders (including those who deposit money in banks) because they will be repaid by a principal that, although equal in absolute terms, becomes worth less in its real terms (its purchasing power). Inflation forces wages to be increased, which in turn increases inflationary pressures in a “wage-price” spiral. But like most everything else in economics, it has some opposite effects. Inflation is good for borrowers because it diminishes the value of their debt. Higher oil prices are particularly good for the American oil industry, which exports some of its product. Causes of Inflation: Recovery: Inflation first increased significantly last year as a side effect of the economic recovery from the Coronavirus 2019 Pandemic, as people have more money to spend, which increased demand relative to supply. Labor and supply shortages: Workers have not been returning to office work after the pandemic, creating a labor shortage. The labor shortage is exacerbated by less migration because of restrictive Trumpist policies and especially since the pandemic by migrant workers and immigrants. Business owners are complaining that they cannot find Americans to do the work that migrants had been doing. It causes supply shortages, which causes price increases and forces employers to raise wages to attract workers, which feeds the wage-price spiral. Supply shortages, caused also by the pandemic or other factors are also causing price increases. Increased government spending: The federal bipartisan Covid-19 relief stimulated more private spending. The federal infrastructure spending, which was also bipartisan, although not as much as the Covid relief, is also beginning to contribute to contribute to economic stimulus. Stimulating economic growth is inflationary, as it increases demand as people have more money to spend. Trumpists have been blaming the spending for inflation, but much of it was bipartisan and there would have not been the economic recovery otherwise. The spending is only partly contributory to inflation. Increased energy prices: A side-effect of recovery is an increase in energy prices, as there is increased demand for the production and shipping of goods and for more travel. But a major contribution to increased prices for oil, the main energy source, is the production cuts by the Organization of Petroleum Exporting Countries (OPEC) cartel to force higher oil prices. Higher oil prices, in turn, influence various economic sectors and the price of everything that is shipped. Energy price increases have been exacerbated by the Russian aggression against Ukraine because it creates uncertainty and because of the necessary embargo on Russian natural gas. Both liberals and Trumpists are opportunistically using higher energy prices to promote their policies and blame the other side for not supporting them, but the spike in energy prices is because of the current causes I have mentioned, which would have occurred regardless of the proposed policies. Increased tariffs: The increase in tariffs, which is an excise tax on imports, did not cause inflation to spike, but I mention it because it has increased prices for certain goods, as it forced importers to raise their prices, and contributed to the baseline of prices from which inflation increased and their reduction or elimination would have mitigated price increases overall. The most inflationary ones were imposed not for security or human rights concerns, but as part of Trumpist protectionist policies that deliberately raised taxes on imported goods to causes price increases to encourage the purchase of more expensive domestically produced goods. Consumers are then forced either to purchase the costlier domestic goods or the higher-priced imports, but either way pay more than they otherwise would, while foreign States retaliate by discouraging our exports by raising tariffs on them. President Joe Biden has reduced some of Trump’s tariffs, particularly on the European Union, but not others. In my next post, I analyze the proposals offered by liberals and Trumpists for inflation and explain why each would not work or even increase inflation or cause other problems.