Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy

Abstract

This paper critically evaluates debates over the causes of U.S. inflation. We first show that claims that the Biden stimulus was the major cause of inflation are mistaken: the key data series – stimulus spending and inflation – move dramatically out of phase. While the first ebbs quickly, the second persistently surges. We then look at alternative explanations of the price rises. We assess four supply side factors: imports, energy prices, rises in corporate profit margins, and COVID. We argue that discussions of COVID’s impact have thus far only tangentially acknowledged the pandemic’s far-reaching effects on labor markets. We conclude that while all four factors played roles in bringing on and sustaining inflation, they cannot explain all of it. There really is an aggregate demand problem. But the surprise surge in demand did not arise from government spending. It came from the unprecedented gains in household wealth, particularly for the richest 10% of households, which we show powered the recovery of aggregate US consumption expenditure especially from July 2021. The final cause of the inflationary surge in the U.S., therefore, was in large measure the unequal (wealth) effects of ultra-loose monetary policy during 2020-2021. This conclusion is important because inflationary pressures are unlikely to subside soon. Going forward, COVID, war, climate change, and the drift to a belligerently multipolar world system are all likely to strain global supply chains. Our conclusion outlines how policy has to change to deal with the reality of steady, but irregular supply shocks. This type of inflation responds only at enormous cost to monetary policies, because it arises mostly from supply-side difficulties that require targeted solutions. But when supply plummets or becomes more variable, fiscal policy also has to adapt: existing explorations of ways to steady demand over the business cycle have to embrace much bolder macroeconomic measures to control over-spending when supply is temporarily constrained.

Foresight in Research : Case studies on future issues and methods

“…algorithms are being used to automate a growing number of tasks, from simple repetitive processes to complex decision-making. This has the potential to greatly increase efficiency and productivity, but also raises concerns about job displacement and broader negative societal impacts (Yudkowsky, 2023;Ferguson, 2023). In direct economic terms, the industrial application of AI and other cutting-edge technologies is discussed in the context of the fourth industrial revolutionin other words, Industry 4.0 refers not merely to a set of breakthrough technologies per se, but should rather be understood in a holistic way as a fundamental digital transformation thatthrough the industrial application of cutting-edge technologiesleads to the emergence of fundamentally new business models and strategies (Götz et al, 2021).…”

“…They probably spent this on investments, real estate purchases, and the like. Ferguson and Storm (2023) strongly refuted the idea that the pandemic related government spending could explain the recent acceleration in inflation. Instead, they claimed that the current inflationary episode may be attributed to various global factors, including import prices and supply bottlenecks, but it cannot be adequately explained by the US economic policy reactions that supported the incomes of workers and unemployed people in response to the impact of the pandemic.…”

Macroeconomic policy at the end of the age of abundance

“…In this view, current inflation driven by transitory factors will ease, but we are entering 'a new age of energy inflation' (Schnabel 2022) in which recurrent commodity shocks are a persistent feature of the new macro landscape (Meadway 2022;Tooze 2022;Cevik/Jalles 2023). While some 'deglobalisation' narratives are overstated, there is potential for ongoing geopolitical tensions and protectionist policy to lead to an increasingly multi-polar world in which fragmented supply chains and hoarding of raw materials contribute to inelastic commodity supply and persistent inflationary pressure (Ferguson/Storm 2023).…”

The Return of Debt Crisis in Developing Countries: Shifting or Maintaining Dominant Development Paradigms?

“…(2023) and the OECD (2023). In contrast to the 1970s, when real wages in core OECD countries such as the US or the UK were rising and profit shares were being squeezed, real wages have now been falling, as the bargaining power of labour is at an all‐time low (Ferguson and Storm, 2023; Stansbury and Summers, 2020; Storm, 2021). Empirical evidence provided by Storm (2022) shows that nominal wage growth in many developing countries, including Argentina, Brazil, Mexico, South Africa and Turkey, has not been keeping up with consumer price inflation during 2019–22 and, hence, real wages are stagnating or declining.…”

“…Empirical evidence provided by Storm (2022) shows that nominal wage growth in many developing countries, including Argentina, Brazil, Mexico, South Africa and Turkey, has not been keeping up with consumer price inflation during 2019–22 and, hence, real wages are stagnating or declining. If one of the core functions of neoliberalism has been to undermine the power of labour and to subordinate it to the needs of capital (Ferguson and Storm, 2023; Harvey, 2011), the current resurgence of inflation, which might yet be transitory, would not appear to be fundamentally challenging neoliberalism.…”