Inflation in the United States is already above 5%. Numerous economists agree that the outbreak of the generalized increase in consumer prices stems from transitory bottlenecks in certain sectors of the production chains. In addition, core inflation, which shows the variability of consumer prices in the short term and is more accurate than the general inflation index (US General CPI) because it excludes the most volatile components (food and energy) from its calculation, is at 4%, which is no less important because it is the highest figure since 1992.
We must not forget that in 2020 a series of stimuli for economic reactivation were approved for an initial 2.2 trillion dollars, to counteract the effects of COVID-19 and the measures restricting mobilization and free trade. The reactivation measures implemented during 2020 and 2021 included direct transfers of money into the pockets of citizens whose main objective was to motivate consumption. This has had serious secular consequences in different parts of the U.S. economic dynamics, as it introduced distortions that were one of the multiple causes of massive resignations in some sectors (The Great American Resignation) added to the low interest rates managed by the Federal Reserve (FED).
During 2020, many entrepreneurs and entire sectors began to replace the capital that was depreciating or to increase their productive capacity instead of investing, this meant that by 2021 several sectors will have a lack of potential productive capacity, accompanied by changes in consumption habits due to drastic variations in household incomes, either by the contraction derived from unemployment or an overexpansion derived from governmental monetary transfers.
Thus, some sectors of the American economy are expanding while others are contracting. In this sense, there are some sectors that experience reductions in demand, while others suffer increases in demand and since productive capacity does not increase with the same speed as latent demand, some sectors have an excess demand that cannot satisfy supply, consequently an increase in the prices of these sectors is generated, generating a series of bottlenecks such as containers, microchips, among others.
These bottlenecks in some sectors have effects on the entire economy, as they prevent supply chains from functioning at their optimum level, triggering an increase in inefficiency to meet latent demand, facing a growing demand for economic recovery with an insufficient supply due to bottlenecks, as for example in the automotive industry, because although vehicles are being assembled, the lack of microchips or containers for transporting parts prevents an increase in the supply of vehicles, generating an increase in prices and having consequences on the other sectors.
A greater demand against an insufficient supply will generate increasing prices, thus with the passage of time and to the extent that the bottlenecks of the economic sectors disappear, and the potential of the productive capacity is concentrated and increased, the price levels will stabilize.
What can we expect from prices for the remainder of 2021 and for 2022?
It is essential to keep in mind that during 2020 and most of 2021, the U.S. government has implemented one of the largest fiscal and monetary stimuli in order to accelerate the pace of the economy’s recovery. While this may be effective in some specific sectors, it is not the same for all, because while there are sectors whose supply can increase proportionally with spending, there are other sectors whose supply is relatively inelastic, this generates inflationary pressures that are perpetrated by the constant stimuli and distortions inserted by the government, preventing the natural stabilization of prices, since it pressures these sectors whose supply is not inelastic with respect to increases in spending to generate bottlenecks that have an effect on the aggregate of the economy.
According to the Bankinter Analysis Department report of 09/29/2021, total annual inflation for 2021 is expected to reach 4.6% with a tendency to stabilize in 2022 and 2023 at around 2.5%.
In summary, the increase in inflationary pressures is mainly due to the fact that aggregate spending has exceeded the economy’s capacity to increase supply with the same speed as the spending derived from the stimulus plans for reactivation. As these stimuli disappear and economic agents stabilize their consumption habits, the bottlenecks that perpetuate price increases will be resolved and consequently prices for U.S. consumers will stabilize.
Jair Viana is an economist from the University of Medellin, specializing in applied economics. Columnist, economic and financial analyst, with specialized studies in Public Policies, Economic Growth and Stability.