Official figures showed Wednesday that U.S. inflation was at 7 percent, its highest level in 40 years. Pundits, politicians and professors have been arguing for months over why it is rising. That disagreement may surprise those who think of economics as having a settled understanding of how the economy works. But in fact, there is tremendous uncertainty about the causes and consequences of today’s inflation.
That helps explain why people are arguing over it so vigorously. Political science research finds that persistent uncertainty gives different key actors reason to try to shape the narrative about what is happening. Those who win the framing debate get to shape the resulting policies.
Experts disagree over how to measure inflation
The 7 percent inflation rate is measured by something called the consumer price index. The CPI is what most commentators focus on. Some observers argue, however, that we should instead measure what’s called “core inflation,” which excludes volatile food and energy prices and has risen by a much less startling 4.7 percent. Still others advocate drilling down into the price rise, noting that almost all the inflation is in goods — the kinds of things people order from Amazon — rather than in services such as plane tickets or haircuts. This group argues that looking at overall rates of inflation distracts us from understanding what’s really going on in our pandemic-ravaged economy.
They also disagree over what to do
People who see inflation as a crisis, such as former treasury secretary Larry Summers, argue that Congress should rein in spending and that the Federal Reserve should hike interest rates to make borrowing harder. They argue that such fiscal and monetary contraction would reduce inflationary pressures; if people have less money, they will spend less, and prices will go down. But that would also slow down growth and throw people out of work.
Others, like former Federal Reserve vice chairman Alan Blinder, argue that these price increases are probably temporary, the result of pandemic pressures to stay home, leading people to order things — goods — exactly when global supply chains of products were fraying under the stress of the pandemic. If that’s accurate, putting the brakes on economic growth would unnecessarily harm families and workers. Price increases, in this view, result from short-term pent-up demand happening at the same time as big drops in supply. One analyst has dubbed this view the ketchup bottle economy.
Under this analysis, tightening the economy might cure the illness of inflation, but at the cost of killing the patient. People who see the pandemic as inflation’s cause argue that inflation will dissipate on its own as supply chain pressures ease and we gradually return to pre-covid living and spending patterns.
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Technical-sounding disagreements have big policy consequences
Despite some analysts’ publicly expressed confidence, no one is entirely sure about what’s causing today’s inflation. That’s hardly new. For better or worse, research in political science suggests that policies result not from conclusive factual analyses but from the triumphant political narratives. And policies affect who wins and who loses financially.
We saw this in the stagflation crisis of the 1970s, when an unprecedented combination of inflation and sluggish growth challenged conventional economic models. So-called neoliberals stressed low inflation as the nonnegotiable goal, and won the debates over how to understand the crisis. The resulting austerity policies of fiscal and monetary tightening helped people with investments and assets by lowering inflation — but they resulted in stagnant wages for workers and skyrocketing inequality. Austerity continued to be policy for decades — even after the 2008 global financial crisis, when negative interest rates and expansionary monetary policies did not in fact bring back inflation. Then, too, economists struggled to make sense of the macroeconomy, noting that the digital economy and globalization kept inflation in check, but coming to little consensus.
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More people are arguing with the austerity advocates
But austerity advocates such as Summers no longer dominate economic discussions. Democrats like Sen. Elizabeth Warren (Mass.) have identified corporate profit-taking and monopoly power as a key source of inflation, an argument echoed by the Biden White House, despite some internal disagreement. Others openly take aim at the very idea that inflation itself is a bad thing, particularly since some of the lowest-paid workers are seeing their wages go up significantly more than inflation, with the labor market so tight.
Whatever idea wins might shape not just government policy, but inflation itself. The neoliberal economist Milton Friedman famously declared that inflation is “always and everywhere a monetary phenomenon.” But evidence supports an alternative argument: Inflation is always and everywhere a political phenomenon.
Economists argue that when people expect inflation, that itself drives prices up — workers may demand higher wages and businesses may raise prices to try to hedge against it. In other words, ideas shape people’s behavior. But these expectations themselves can be changed by political narratives.
If Americans come to believe that inflation is temporary, they will behave differently than in a world where they expect it’s here to stay. But if those who worry about long-term inflation persuade Americans that it’s a real threat, they may be creating a self-fulfilling prophecy of rising prices.
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Kathleen R. McNamara (@ProfKMcNamara) is professor of government and foreign service at Georgetown University, where she co-directs the Global Political Economy Project.