It’s back! Many Americans have never experienced it before. Those over 60 years old remember inflation in the 1970s and 1980s. It was horrendous. Many people’s standard of living declined for nearly 10 consecutive years, even if their income grew at 5% per year. That is because prices continued to rise from 6% to as high as 14% every year. I remember that my first mortgage was at 12.75% in 1982. I thought that was a great rate. It had come down from 16% less than a year before.
The common definition of inflation is “too much money chasing too few goods.” The US economic system is a free system. It is one in which the government usually exerts no direct control over costs or prices charged for goods. Sometimes the government will provide incentives for people or companies to buy and sell in a certain way. It can do that by taxing things it wants to see reduced, such as cigarettes. It can also incentivize companies to build plants or manufacture certain goods or even hire certain people by giving it tax breaks, rewarding the behavior the government wants. However, the setting of prices is, for the most part, free to move with market cycles.
If you recall economics class, you probably learned that if more people want to buy a product than the inventory of that product on hand, the free market system determines who gets the product by raising the price until demand wanes. Those who want it badly enough to pay the higher price will get the product and those who don’t want it at a higher price will not buy it. Likewise if a company manufactures more product than there is demand for, in order to move the product it will lower the price. More people will buy because they are getting a good deal and the price has come down to the amount that they are willing to pay for it. Therefore the definition of inflation, “too much money chasing too few goods” is a good basic truth.
Our question again is, ‘can anyone be blamed for inflation?’ The answer is yes. If the government does something that restricts the availability of a product, the price will rise. A simple picture of this is the increase in gasoline and natural gas prices over the past two years. The Biden administration is anxious to move away from fossil fuels (oil, natural gas and coal) to cleaner sources of energy such as wind and solar. The trouble has been that fossil fuel is relatively inexpensive and alternative sources of energy cost more to produce. One of Biden’s first actions as President was to discontinue work on the Keystone oil pipeline from Canada to the Gulf of Mexico. No pipeline means higher transportation costs and an increase in the price of fuel. In addition, oil exploration companies can have all of the leases to operate on land that they want but unless permits to drill are granted without unreasonable restrictions, drilling won’t happen and the amount of oil available inside the United States will decline. As the amount of oil declined, prices went up. This price increase in oil products is exactly what most Democrats want. If the price of oil products rises, the more expensive wind and solar energy can come closer to competing on price.
The American population is not ready to give up their gas powered cars so demand continued. America, which had been self-sustaining in oil and gas prior to the Biden Administration, now has to go to other countries to buy oil and natural gas. In the case of gas prices, much of the recent increases have been the result of the Biden Administration policies.
This price increase in oil products is exactly what most Democrats want. If the price of oil products rises, the more expensive wind and solar energy can come closer to competing on price.
Not all of the price increases can be blamed there though. Some other factors have created an impact. Russia’s invasion of Ukraine has had an impact. Oil and gas are one of Russia’s greatest exports. In order to try to ‘starve the beast,’ America and its allies stopped buying gas from Russia. The amount of available gas declined and prices rose. There are also cyclical factors that cause demand to increase. Gasoline prices usually go up in the summer because demand is high. Everyone wants to go on vacation so driving increases. Demand goes up so prices rise.
The other factor that can cause prices to rise is too much money in the economy. In 2020, in the midst of COVID, the government mandated businesses to shut down and employees to stay home. The Trump administration realized that the economy would crash if the government did not come up with some way to prop it up. The decision was made to give away free money, intending that it keep businesses from going under and that it gets into the hands of laid off employees so they could pay their bills. This was something that had never been done before in the United States and it had to be done quickly. Money flew out door and got into people’s hands. It served its purpose but it also turned out to be less than perfect. Extra money went to a lot of people who didn’t need it. For example retirees who still had their regular income just as before COVID. The extra income was a boon to them. There were others whose incomes continued but were still sent thousands of dollars of extra money. On the business side, small businesses were indeed propped up. However, in a lot of cases, they were allowed to keep more money than they actually needed. All of this put extra cash in the hands of people. Too much cash chasing too few goods.
When the Biden Administration took over, they continued to send out more than a trillion dollars of more money to Americans who were getting back to work. Extra cash in the hands of people. People who have college debt were recently given a pass on $10,000 of their college loans. The money that would normally be used to pay off those loans now was available to be spent on other things. All of this money swashing around the economy and the prices began to rise, just as the definition says.
Many other things can have an impact on prices. The economy is a complex beast. However, my goal was to demonstrate that decisions made in Washington do have an impact on supply and demand. Excess cash or restricted products will cause prices to rise just as they have over the past two years.
As you study the candidates for national office in your state this year, dig in and find out what their opinions are with regard to handing out cash or making it harder to drill for oil or other produce other goods or services. Consider what impact their policy recommendations will have on prices.
I’m afraid that inflation is with us for a while and our standard of living will likely decline for a few years. It doesn’t have to be here forever. Government policy can tame inflation as well.