Mounting Inflation Fears Put Pressure on the Biden White House

Americans are growing increasingly concerned about rising prices as pressure grows on the Biden administration and the Federal Reserve to prevent inflation from outpacing income growth. According to a recent Labor Department report, the consumer price index went up in April by 0.8%, a part of a 4.2% increase over the past 12 months. This is the highest monthly increase since 1982 and the fastest annual rate since 2008. 

Following a year of lockdown measures, many manufacturers and other industries are struggling to get back on their feet, which is causing supply shortages. As people are finally able to spend, the demand has grown, and prices skyrocketed. There is a steep increase in airfare prices, recreation as well as household goods and services. All of these fell sharply in 2020. 

The most notable is the supply shortage of used cars, which constitutes roughly a third of the CPI surge as the prices increased by approximately 10% - the highest level in years. This is partly fuelled by people who fled large population centers during the pandemic and now need cars to get around. In addition, several stimulus checks were used to fund down payments on vehicles, while the Fed’s low interest rates made car loans more affordable.  

“Now people are spending again, and obviously April’s numbers show that they’re spending even more aggressively than forecasters, most of them, anticipated,” economic policy expert George Selgin said. “The big story is the pent-up demand and purchasing power that people have finally started to dispose of.” 

While the overall feeling is that this is a great sign of a brighter future, consumer sentiment is deteriorating due to inflation levels that Americans haven’t seen in years. While inflation was expected, the sharp increase in prices is fuelling criticism of the administration’s post-pandemic recovery plan. 

On the other hand, many economists have dismissed inflation concerns. They are sticking to forecasts that things will get back to normal after the economy settles into a regular pace of recovery following a few months of high inflation.

“It would be premature and kind of an overreaction to look at the [April CPI report] in particular and to be overly concerned.” said senior economist at MacroPolicy Perspectives, Laura Rosner-Warburton.

She added that a couple of very short-term factors drove the jump in prices and that on a year-over-year basis, the inflation is increasingly higher because there was an outright decline the previous year. Rosner-Warburton believes that demand will cool off as the fiscal stimulus fades, and with the soon-to-be rising supply, the inflation is bound to subside and ultimately disappear.