Recently, inflation for the price of food, fuel and other staples hit a record 30-year high. Inflation corresponds to a decrease in purchasing power. When the price of a good increases, the purchasing power of the dollar can buy fewer goods and services. Duke University economists recently discussed the causes of inflation from pandemic relief and how it can affect a day-to-day life.
Inflation is typically driven on the demand side because of excessive monetary policy. Connel Fullenkamp, a professor and director of undergraduate studies in the Duke economics department, said monetary stimuli, like the American Rescue Plan, have been part of the financial landscape for more than a decade.
“We had the massive fiscal stimulus that took place with the Biden administration’s response to the pandemic,” Fullenkamp said. “Literally trillions of dollars being spent and put into the American economy. Families getting checks [and] businesses getting support for their employees.”
Fullenkamp said the stimulus is leading to an outstanding amount of demand. Supply chain issues, however, prevent goods from getting into consumer’s hands. He said despite recent wage increases, the purchasing power for many families is actually decreasing.
“We have wage increases at the pace of 3, 3 and a half percent which was really unusual for the past decade and high inflation that’s at 5 percent or 6 percent comes by and unravels that rather quickly,” Fullenkamp said. “It does the damage in exactly the places that low-income families are most vulnerable.”
This is evident in the increased price of rent, energy and even grocery store products. Fullenkamp called it a “classic wage price spiral.”
“Over long periods of time, it’s an unfortunate truth that wages really never quite catch up to inflation, at least not in the short-term,” Fullenkamp said.
Emma Rasiel is an associate chair and professor in the Duke department of economics. She said during the pandemic there was a lot of uncertainty in how to plan for a crisis like COVID-19.
“We saw a lot of hoarding and shortages last year when there were concerns about things like toilet paper and so on,” Rasiel said.
She said that was a pandemic-driven response but a similar response could happen for day-to-day goods within a high inflation environment.
“For non-perishables if people are worried that the prices of those are going to go up a lot and they’re essentials, people may stockpile them,” Raisel said. “That has the impact of creating a vicious cycle as it becomes harder and harder to buy them and that can also drive prices of those up.”
The Duke economists said the omicron variant of the coronavirus pandemic could provide some short-term relief from inflation, because the market readjusts prices for goods preparing for the worst case scenario. In the long-term it could postpone the recovery of the supply chain.
Rasiel said some solutions in the long-term are to avoid panicking and avoid hoarding goods.
“Inflation is self-fulfilling in many ways,” Rasiel said. “If everyone believes there will be inflation, there will be.”
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