The debate over inflation has taken a bizarre twist in the last couple of weeks. Russia’s invasion of Ukraine, and the threat of much of its oil being removed from world markets, has sent the price of oil and other commodities soaring. In addition, a new outbreak of COVID-19 in China has led to shutdowns in many of the country’s major manufacturing plants. This means that supply chain problems are likely to persist longer in the future than many of us have expected.
In addition to being bad news for the people of Ukraine and those infected in China, these events are also bad news for the US economy. They mean that inflationary pressures in many sectors will persist for some time into the future, and possibly get worse.
Bizarrely, these events also seem to have produced a new round of “I told you so’s” from the inflation hawks. I’m not quite sure what the hawks think they told us in this story.
If they forecast the war in Ukraine, they deserve credit for their perceptive understanding of international relations. If they recognized both, that the virus would mutate into new strains, and that China would maintain its zero COVID-19 policy, they were more on top of matters than most of our epidemiologists. But I’m not sure what this has to do with the claim that Biden’s stimulus would lead to runaway inflation.
Even if there had been no stimulus package, the threat of Russia’s oil being withdrawn from world markets would have led to a sharp surge in the price of oil. Similarly, losing a substantial quantity of imported products and parts from China would lead to shortages and production disruptions whether or not Congress had passed Biden’s stimulus.
As many of us have repeatedly pointed out, almost all wealthy countries have seen big jumps in their inflation rates, even though their economies were not boosted by Biden’s stimulus package. In the United Kingdom, the central bank now expects its inflation rate to cross 8.0 percent. Perhaps the inflation hawks want to blame this on Biden’s stimulus as well, but that really doesn’t pass the laugh test.
There will be serious economic fallout from the war in Ukraine, as well as future waves of the pandemic. We will need to find effective ways to deal with these problems. However, sharp increases in interest rates by the Fed are not a cure to either problem. They may be able to reduce inflation, by pushing the unemployment rate higher, and thereby pushing down workers’ wages, but most would likely view this as a solution that is worse than the problem.
We should look for ways to address the prospect of less oil on world markets, such as paying individuals and countries to use less oil. We also should look to better ways to contain the pandemic, first and foremost by getting the world vaccinated.
But throwing millions out of work, to drive down the wages of tens of millions, is not a clever way to deal with these problems.