By Steven Rattner, The New York Times, Feb. 17, 2022
The bulk of our supply problems are the product of an overstimulated economy, not the cause of it. …Americans have resumed spending freely, and along the way, they have been creating shortages akin to those in a shopping mall on Black Friday.
All that consumption has resulted from vast amounts of government rescue aid (including three rounds of stimulus checks) and substantial underspending by consumers during the lockdown phase of the Covid crisis. … It’s a classic economic case of “too much money chasing too few goods,” resulting in both higher prices and, given the extreme surge in demand, shortages. … The Commerce Department reported last week that imports into the United States surged by almost 21 percent last year. …
Smaller government budget deficits reduce net spending by government, thus helping offset demand by consumers. [end quote]
Bingo! “Guns’N’Butter” spending caused high inflation in the 1970s.
Do METARs want to predict what will happen to inflation in the coming years? Watch government fiscal stimulus, which puts spending power into consumer hands. Watch transfer payments, which put money (demand) into people’s hands without increasing productivity (supply). Watch military spending.
Government transfer payments spiked in 2020 and 2021 due to the Covid Economic Impact Payments. Although there probably won’t be another EIP in 2022, the level of transfer payments is significantly higher (roughly 30% higher) now than it was before the pandemic started.
The new infrastructure bill will pump $550 Billion in new spending over 5 years. I’m totally in favor of repairing America’s deteriorating infrastructure but the money will not produce new consumer goods or services. It’s inflationary.
Further deficit spending will be inflationary.
If demand goes up because consumers have more money while supply does not keep pace, inflation will result. That’s the simple reality.
I see more inflation in our future unless there is a reduction in deficit spending and/or a recession which is a painful way of reducing demand.