By Paul Roberts / For The Herald
Inflation is described as too many dollars chasing too few goods.
It reflects an imbalance in the supply and demand of goods and services. The interaction between supply and demand sets prices in the economy for all manner of goods and services. Too much demand or too little supply can result in higher prices and inflation.
The current round of inflation is largely the result of dislocations in the global economy. The primary drivers are: the covid pandemic disrupting supply chains; the Russian invasion and war in Ukraine; government spending related to entitlements, defense, covid and economic recovery; and climate change. All of these factors contribute to inflation, though they are experienced differently around the globe.
The covid pandemic significantly disrupted global supply chains. A “just-in-time” model for delivering goods to markets was no longer able to deliver on time. The supply of raw materials and finished goods was locked up as covid required lock-downs. Workers were no longer able to safely get to their workplaces.
Supply chain disruptions have improved and covid restrictions have eased. And revisions to supply chains, work-arounds and resets are allowing the economy and labor to resume more normal patterns. However, the economy is not yet fully back to normal, and what we consider normal may be redefined, such as for labor markets, health care and real estate.
The Russian invasion and war in Ukraine has disrupted supplies of fuel, food and fertilizer. Additionally, the cost of prosecuting the war in terms of lives, refugees, war materiel and opportunity costs (lost opportunities) are difficult to measure. There is currently no clear path toward a resolution. The economic and inflationary impacts of the war are felt most dramatically in Europe in terms of refugees, energy costs and defense materials; and in Africa where food imports from Ukraine and elsewhere are disrupted and local agriculture shortages are exacerbated by drought and climate change. While these inflationary pressures are greater in Europe and parts of Africa, they are felt around the globe.
Government spending among the industrialized nations is occurring in response to covid impacts and recovery, economic stabilization, war efforts for many nations including the United States and European Union, entitlements — for aging populations, pensions, Social Security and health care — and climate change. These pressures will persist at least through next year, and some for many years to come.
Climate change is adding to inflationary pressures with extreme weather events increasing in frequency, intensity and cost. The consequences of climate change vary depending on location, however impacts on water, agriculture, food supply, energy, infrastructure and disaster response add increasing costs to public and private sectors. These conditions will worsen until fossil fuel consumption and greenhouse gases are reduced.
The rate of inflation varies from nation to nation. In recent months it has come down from high points in 2022. The U.S. inflation rate is currently around 5 percent. In Europe inflation is higher; 10 percent in the United Kingdom, 7.4 percent in Germany and 7.6 percent in Italy.
The primary tool to combat inflation is higher interest rates, intended to slow down the economy and inflation pressures by increasing the cost of borrowing. Central banks around the globe, including the Federal Reserve in the U.S., have moved to raise interest rates.
The current round of inflation is driven by complex global events. In our divided country and Congress, complexity provides cover for spinning myths, cherry picking data and weaponizing issues. Meaningful policy solutions are fact based and nuanced. The next two articles will examine deficits and the debt ceiling, and the road ahead.
Paul Roberts is retired and lives in Everett. His career spans over five decades in infrastructure, economics and environmental policy.
Economics 101
This is the first of three articles intended to unpack complex economic issues, expose myths and provide context for the news and social media reporting on the economy, debt and deficits. It will hopefully provide a reliable signal in the cacophony surrounding these issues. Sources for this work are respected publications and economists including: The Economist (a weekly publication), Moody’s (a financial rating organization), Bloomberg and Forbes (respected media organizations reporting on business and economics), Trading Economics (an economic data reporting firm) and the U.S. Department of the Treasury.
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