With soaring prices reaching levels not seen since 1982 in the United States, the Federal Reserve is preparing to use its traditional weapons against inflation. But economists assure that in this pandemic context, we should look to other solutions.
The United States had not experienced such a surge in prices since 1982 and the so-called “Great Inflation”. They were up 7% in December 2021 compared to the same time a year earlier, the US Department of Labor revealed, wednesday 12 january.
But what is even more worrying for economists is that this surge in prices continues to be confirmed since it has now been seven months in a row in the United States, recalls The Guardian.
No wonder the supporters of an optimistic view of the economy are more discreet in this context. Among them was Jerome Powell, the boss of the Central Bank of the United States (Fed), who staunchly maintained until the end of 2021 that inflation was only transitory, and that it should be left to the global economy time to adapt to the new post-pandemic reality.
The Fed has just changed sides. Shortly before the announcement of the inflation figures, it had abandoned the term “transitory” to refer to rising prices. “Inflation is a serious threat, and if we have to raise rates we will,” assured Jerome Powell.
He added that it may be necessary to stop the policy of “aggressive monetary support to the economy. [comme durant la pandémie, NDLR]”to try to limit this progression.
Rising rates and falling liquidity injections into the market have been the traditional weapons of central banks to fight against inflationary risk since the end of the 1970s. Their goal: to slow down consumption – since money is more expensive and more expensive. ‘There is less in circulation – which would push prices up if demand exceeds supply.
The application of this classic anti-inflation treatment is not without risk of undesirable side effects. “Rising interest rates in the United States in the 1970s drove prices down sharply, but it also caused unemployment to rise to record levels and bankrupted heavily indebted Mexico,” recalls the Wall Street Journal. Indeed, the drop in consumption leads to a drop in activity which can lead to a recession, while the interest rate hikes imply that the indebted countries (like Mexico at the time) must repay more.
But this traditional “common sense” of the fight against inflation is increasingly called into question. “Today, we no longer have a valid theory to explain inflation,” says Duncan Weldon, an influential British economic commentator, in an analysis note published in October 2021.
“The fact that prices did not rise when interest rates were very low for years and there was so little unemployment in the United States defies conventional theories of inflation,” summed up Adam Tooze, an economist at Columbia University on his blog. One of the most eminent economists of the Fed, Jeremy Rudd, moreover caused a small sensation in the economic circles by publishing, in September 2021, a note in which he acknowledges that the American Central Bank no longer knew which way to turn to forecast inflation.
This context of theoretical vagueness has allowed other voices to be heard to propose alternative medicines against the inflation of this pandemic era.
Control prices like in wartime. Shortly after Christmas, a German economist stationed at Amherst University in Massachusetts, Isabella Weber, sparked a strong reaction in American economic circles with a proposal that smacked of interventionist economics. “It’s a completely stupid idea”, reacted in particular Paul Krugman, the very influential and progressive Nobel Prize winner in economics 2008.
Isabella Weber’s sin? In column published on December 28 by The Guardian, she argued for price control as after World War II. She argued that it was wrong to compare current inflationary pressure to that of the 1970s and that it was better to draw a parallel with 1946.
Then, like today, hundreds of millions of consumers were emerging from a period of deprivation (war then, confinement today) and seeking to spend their savings. Unfortunately, the supply did not follow – factories to be rebuilt after the war, supply chain in poor condition today – which spawned inflation. The American government had opted for price controls in order to limit increases until the productive apparatus got back into working order. Why not do the same today, asks Isabella Weber.
“It will not work”, responded voices both on the right of the political-economic spectrum and on the left. Some ultra-liberal economists like the Spaniard Daniel Lacalle have deemed this proposal worthy “disastrous economic policies in Venezuela or Argentina”. Others, like Paul Krugman, argue that such measures do not correct the root causes of inflation and are only temporary dressings.
Haro on large groups. Blame it on the greed of the big groups? For some economists and historians, there is little doubt that the pricing policy of Walmart, Amazon, and other brands in a virtual monopoly situation partly explain inflation.
“Inflation is only a symptom. The evil stems from the too great concentration of economic power in the hands of a few large groups”, to Robert Reich, the US Minister of Labor under Bill Clinton. This is also the opinion of Meg Jacobs, a specialist in American economic history, who assures us that “large groups must be dismantled if we want to fight inflation”, in a column published by the New York Times.
They recall that in 2021 most of these behemoths “increased their profits compared to 2020 even though the cost of raw materials, the cost of labor and the prices of freight transport had exploded because of the pandemic”, underlines CNN. In other words, these companies “have offset these cost increases by exploding prices for consumers”, adds the American news channel.
“These groups were able to afford it only because they do not have real competitors capable of offering alternatives at lower prices,” Judge Robert Reich. Consequence: “the fastest way to fight against inflation is to break these monopolies in order to create more competitive environments”, assures Meg Jacobs.
More immigrants to lower prices. The American Chamber of Commerce proposes to tackle record inflation by bringing in more immigrant workers.
What is the relationship between immigration and inflation? One of the causes of soaring prices is that products are struggling to get to the shelves when consumers want to buy them. These goods are rare and therefore more expensive. If there are so few, it is because the United States faces a historic shortage of manpower in certain poorly paid sectors such as freight transport.
The Chamber of Commerce therefore wants the United States to open wide these borders to attract immigrants who would do this job that the Americans no longer want. “This would restore the balance between supply of goods and demand,” concludes Suzanne Clark, director of the Chamber of Commerce, interviewed by CNN.