All prices are controlled by supply and demand. If the demand for goods/ services grows faster than the supply, the free market price will rise. (This does not include monopolies.)
It’s important for METARs to analyze how much of the current inflation is caused by trade imbalances (Covid restrictions, supply chain bottlenecks, sanctions against Russia, etc.), how much by monetary stimulus and how much by fiscal stimulus. Obviously, every line item will be affected differently. The net result is a combination of all three factors.
Fiscal stimulus is the result of government spending and tax policy. The stimulus can be government purchases of goods and services or transfer payments (no value received in return). Governments paid massive amounts of unemplyment insurance and helicopter money in 2020 and 2021. Federal Net Outlays as Percent of Gross Domestic Product was 31% in 2020 and 30% in 2021 – a gigantic amount only exceeded by World War 2.
The intention was for people to spend the money immediately to stimulate the economy. The double pulse of money went into savings and left almost as quickly. Personal Saving in 1Q2022 was lower than it was in 4Q2019. I’m sure that this is why the Federal Reserve thought that the 2021 inflation caused by the fiscal stimulus would be transitory, since the Covid-related money was essentially gone by 1Q2022.
https://fred.stlouisfed.org/series/FGEXPND
https://fred.stlouisfed.org/series/A084RC1Q027SBEA
https://fred.stlouisfed.org/series/FYONGDA188S
https://fred.stlouisfed.org/series/PSAVE
While fiscal stimulus goes directly into consumer hands, monetary stimulus goes to banks. The banks lend the money which is then invested in assets such as stocks, bonds, real estate, capital expenditures (e.g. vehicles). The fed funds rate has been below inflation for years.
https://fred.stlouisfed.org/series/WALCL
https://fred.stlouisfed.org/series/FEDFUNDS
Inflation is now being controlled by trade imbalances with the Fed trying to reverse years of ultra-loose monetary policy without causing a recession, mass failures of zombie companies and/or a bond market rout.
Wendy