2021–2023 inflation surge

Consumer spending on goods in the United States and elsewhere moved in tandem with spending on services (see goods and services) before the COVID-19 recession, but upon emerging from the recession consumers shifted spending towards goods and away from services, particularly in the United States. In countries where food constituted a large part of the inflation increase, rising prices forced low-income consumers to reduce spending on other goods, thereby slowing economic growth. "In those countries with high inflation, consumer spending has weakened because household spending power has taken a hit from rising prices," said William Jackson of Capital Economics, "And you've generally seen much more aggressive moves to tighten monetary policy." In June 2022, The Atlantic published an editorial article by James Surowiecki, critical towards the U.S. Department of the Treasury controlling inflation. In 2021, Janet Yellen called the risk of inflation "small" and "manageable", and equally Federal Reserve Chairman Jerome Powell thought inflation would be "transitory", even as inflation rose above 6 percent. In 2023, the International Monetary Fund ascertained that "food and energy are the main drivers of this inflation", as rising prices continue to squeeze living standards not only in North America but worldwide. Six out of ten (59%) EU enterprises were concerned about energy prices in 2023, and five out of ten (47%) were concerned about uncertainty, with some country variations. Energy cost rises were more common in EU businesses than in US firms (93% vs. 83%). Manufacturing businesses were the most likely to have encountered a 25% or more rise in energy spending, while the construction sector had the lowest number of firms suffering a 25% or greater increase in energy spending, although more than half of firms reported this. Supply chain disruptions Some economists attribute the U.S. inflation surge to product shortages resulting from the global supply-chain problems, itself largely caused by the COVID-19 pandemic. The higher demand caused by the U.S. government's $5 trillion aid spending exacerbated supply-side issues in the United States; according to the Federal Reserve Bank of San Francisco researchers, this contributed 3 percentage points to inflation by the end of 2021. They argued that the spending measures were nevertheless necessary to prevent deflation, which would have been harder to manage than inflation. Consumer prices have reached an all-time high within the last thirty years, soaring by 6.2% from the previous year, things like restaurant prices to clothes and the most popular being fuel, have drastically increased. During the pandemic, the number of workers working worldwide plunged and had an immediate impact on the United States as less than a third of the global population has been vaccinated. Countries that supplied the United States with shoes and clothes such as Vietnam have had factory hub shortages due to not having enough vaccinated workers. In June 2022, BlackRock CEO Larry Fink argued that consumer demand in the United States had remained steady compared to pre-pandemic years, with supply-chain issues overseas being the primary cause of the post-pandemic inflation surge. He attributed this to some countries taking longer (than the U.S.) to resume economic activity, thereby disrupting international trade. Shifting demand During the COVID-19 lockdown, demand shifts during the pandemic towards many home-related goods outpaced supply, contributing to inflation. Demand for groceries has continued to be high after the pandemic as people's habits have changed, which is one of the factors pushing up grocery prices into 2024. Increasing energy demand is one of the causes of persistent energy inflation. Fiscal and monetary policy Among the factors contributing to the surge of inflation were the unprecedented levels of fiscal and monetary stimulus enacted to sustain household incomes and the liquidity of financial institutions in the 2020–2021 period. Many governments around the world adopted such stimulatory actions early in the COVID-19 pandemic. Some immediate actions were taken by banking systems around the world by increasing interest rates or making changes to other policies. Higher interest rates make borrowing more expensive, reducing consumption. This is put into place purposely to maintain a level of consumption that will contribute to a steady level of inflation or decrease it, this is also known as inflation targeting. Deficit spending increases inflation, as detailed in the fiscal theory of the price level. Tax cuts are generally viewed as inflationary while tax hikes are usually viewed as deflationary. money supply (red); recessions in gray Milton Friedman, a libertarian-conservative monetary economist who was awarded the 1976 Nobel Prize in economics, said in 1963 that "inflation is always and everywhere a monetary phenomenon." Austrian school economist Gottfried von Haberler amplified Friedman in 1985, asserting, "there has never been a significant inflation or stagflation — prices rising, say, by 4 percent or more a year for two or more years — without a significant growth in the stock of money." This quantity theory of money has long been popular with libertarian-conservative critics of the Federal Reserve. During the pandemic and its immediate aftermath, the M2 money supply increased at the fastest rate in decades, leading some to link the growth to the inflation surge. Fed chairman Jerome Powell said in December 2021 that the once-strong link between the money supply and inflation "ended about 40 years ago," due to financial innovations and deregulation. Powell's immediate predecessors, Ben Bernanke and Alan Greenspan, had previously concurred with this position. The broadest measure of money supply, M2, increased about 45% from 2010 through 2015, far faster than GDP growth, yet the inflation rate declined during that period — the opposite of what monetarism would have predicted. A lower velocity of money than was historically the case was also cited for a diminished effect of growth in the money supply on inflation. Surveys of economists conducted by the University of Chicago Booth School of Business in November 2021 and January 2022 showed that more economists agreed than disagreed (with many expressing uncertainty) that while contributing to rising prices in the United States, the global supply chain crisis would not contribute to a higher long-term inflation rate above the Federal Reserve's inflation target and was not the main driver of the inflation surge, but that the combined effect of the stimulative fiscal and monetary policies being implemented in the United States posed a risk of prolonged higher inflation. Housing shortage Lags in the construction of new housing were cited as a major factor in inflation in the US, with Katy O'Donnell of Politico arguing that housing shortages were the single-biggest contributor to inflation. The U.S. Census Bureau found that if housing costs were taken out, inflation at the end of 2023 would have been 1.8% instead of 3.2%. Reuters noted how shelter costs or 'shelter inflation' surged during the pandemic. Artificial scarcity in the supply of housing, due to NIMBYism, has been a significant factor in making housing more expensive. Freddie Mac estimated that the housing shortage surged 52% between 2018 and 2020. Increased insurance premiums have also occurred in areas that experienced more frequent and intense wildfires and floods due to climate change. Price gouging and windfall profits In the United States, some Democratic politicians, economists and observers have used the term "greedflation" to contend that "seller's inflation" exacerbated the inflation surge in the United States. This term saw so much use that "greedflation" was a candidate for word of the year for the Collins English Dictionary in 2023, and was added to Dictionary.com in 2024. Collins Dictionary defines it as either "the use of inflation as an excuse to raise prices to artificially high levels in order to increase corporate profits" or "an increase in the price of goods and services caused by businesses increasing their prices by more than their costs have risen". Supporters of the idea argued that the market concentration that has occurred in recent decades in some major industries, especially retailing, has given companies the ability to wield near-monopolistic pricing power. Many economists responded by noting that if these large corporations indeed had so much market power, they could have used it to increase prices at any time, regardless of the pandemic. In 2022, several economists stated that price gouging could be a minor contributor to continuing inflation, but it is not one of the major underlying causes that started this surge. Justin Wolfers, an economist at the University of Michigan quotes Jason Furman, who served as chair of the Council of Economic Advisers under President Obama said, "Blaming inflation on [corporate] greed is like blaming a plane crash on gravity. It is technically correct, but it entirely misses the point." Wolfers states that companies will always charge the highest prices possible, but that competition keeps prices in check. Some economists and professors, such as Paul Donovan, Isabella Weber, Albert Edwards, and Z. John Zhang, argue that during times of high inflation consumers know prices are increasing but may not have a good understanding of what reasonable prices should be, allowing retailers to raise prices faster than the cost inflation they are experiencing, resulting in larger profits. Zhang, a professor of marketing at the Wharton School at the University of Pennsylvania said: "In the inflationary environment, everybody knows that prices are increasing. Obviously that's a great opportunity for every firm to realign their prices as much as they can. You're not going to have an opportunity again like this for a long time." A 2021 analysis conducted by The New York Times found that profit margins across more than 2,000 publicly traded companies were well above the pre-pandemic average during the year, as corporate profits reached a record high. Economists at the University of Massachusetts Amherst found that in 2022 profit margins of US companies reached their highest level since the aftermath of World War II. The economists say firms with a lot of market power in consolidated industries can raise prices under the cover of inflation as a form of implicit cartel-like coordination. European Central Bank economists found in May 2023 that businesses were using the surge as a rare opportunity to boost their profit margins, finding it was a bigger factor than rising wages in fueling inflation during the second half of 2022. In January 2023, the Federal Reserve Bank of Kansas City, released a study which stated that "...markup growth likely contributed more than 50 percent to inflation in 2021, a substantially higher contribution than during the preceding decade. However, the markup itself is determined by a host of unobservable factors, ... We conclude that an increase in markups likely provides a signal that price setters expect persistent increases in their future costs of production." An International Monetary Fund study published in June 2023 found that rising corporate profits accounted for almost half of the increase in euro area inflation during the preceding two years. In July 2023, The Economist criticized the entire concept of greedflation as "nonsense" and argued that rising prices are not due to "greedy companies" but are a natural result of supply and demand issues caused by the cash infusion to the economy which took place during the COVID-19 pandemic. A December 2023 paper published by the UK-based Institute for Public Policy Research and Common Wealth think tanks stated that corporate profiteering played an important role in the inflation spike of 2022. Corporate profits surged while wages failed to keep pace with rising prices, resulting in the working class suffering the largest decline in disposable and discretionary income since World War II. 2024 studies by the Groundwork Collaborative had similar findings. Libertarian critics, citing a study by the Cato Institute, accused the Groundwork Collaborative study of deliberately "cherry pick[ing] a one-year timeframe [2023] to tell a misleading story", and that profits are not a major factor in inflation. In the words of Paul Hannon writing for The Wall Street Journal in December 2023, "[t]here is broad consensus among economists that the role of profits in fueling inflation is one feature of the recent inflationary episode that made it different from the 1970s. Yet how much of a role profits played is the subject of controversy." Fossil fuels Shortly after initial energy price shocks caused by the Russian invasion of Ukraine subsided, oil companies found that supply chain constrictions, already exacerbated by the ongoing global COVID-19 pandemic, supported price inelasticity, i.e., they began lowering prices to match the price of oil when it fell much more slowly than they had increased their prices when costs rose. The major American and British oil producers (Big Oil) reported record profits in 2022. Amid longstanding constraints in refinery capacity, refinery profit margins were higher than their historical averages. In July, the UK imposed a 25% windfall profit tax on British North Sea oil producers, which expected to raise £5 billion to pay for a government scheme that reduced household energy costs. In late October, U.S. President Joe Biden accused the oil and gas sector of "war profiteering" and threatened to seek a windfall profit tax if the industry did not increase production to curb gasoline prices. Coming out of the COVID-19 pandemic, some argued for the possibility of a base effect phenomenon due to cheaper than normal prices, such as for oil, at the onset of the pandemic, followed by above-average prices which exacerbated the perceived inflation. Analysis published in June 2023 by the Bureau of Labor Statistics found that from February 2020 through May 2023, gasoline retailing profit margins had increased 62%. Grocery prices An analysis published in early 2024 by the White House Council of Economic Advisers found that grocery and beverage retailers had increased their margins by nearly two percentage points since the eve of the pandemic, to the highest level in two decades. The analysis found that grocer margins had remained elevated as the inflation surge eased, though margins for other types of retailers had fallen back to historical levels. President Joe Biden and others asserted that shrinkflation, a practice of reducing portion or quantity sizes of packaged foods while maintaining the same price, was keeping profit margins higher than usual. The Federal Trade Commission released a report in March 2024 finding that large grocery retailers "accelerated and distorted" the effects of supply chain disruptions to protect their profits. The analysis found that some large retailers "seem to have used rising costs as an opportunity to further hike prices to increase their profits, and profits remain elevated even as supply chain pressures have eased." The study found some large retailers sought to gain an advantage over smaller competitors by threatening suppliers with large fines if strict delivery requirements were not met, and that in some cases "suppliers preferentially allocated product to the purchasers threatening to fine them." Some suppliers, however, were already contractually bound to supply other retailers. FTC chair Lina Khan said "dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve." Although the pace of grocery price increases had abated since the 2022 surge, prices had not since fallen overall by 2024. Retailers have said they planned smaller price increases in 2024 as consumers had begun to push back against high prices, causing some retailers to lose sales. Kroger's top pricing executive wrote in a March 2024 internal email, "On milk and eggs, retail inflation has been significantly higher than cost inflation." The meat industry in the United States has also been cited as an example where profits went up industry-wide as prices went up, with some pointing to consolidation and a lack of competition as an underlying cause. In 2024, Ernie Tedeschi argued that no more than one-fourth of the grocery inflation in the U.S. during COVID could be attributed to greedflation. In Australia in 2023 and 2024, major supermarket chains Coles and Woolworths received criticism as price gouging, with critics pointing to their 65% share of Australia's grocery market, as well as their higher prices in neighborhoods with less competition. Motor vehicle prices In the United States, higher motor vehicle prices were a significant contributor to the inflation surge. An analysis published in May 2023 by The New York Times found that auto manufacturers and dealers shifted from a high volume-low margin business model before the pandemic to a low volume-high margin model during the pandemic. Manufacturers emphasized higher-margin luxury vehicles, while dealers increased their markups over manufacturer list prices. A study published by the Bureau of Labor Statistics, the agency that tracks consumer prices, found that dealer markups accounted for 35% to 62% of new vehicle inflation from 2019 to 2022. Paul Ryan, the CEO of a shopping app that monitors prices across about 40,000 dealerships, remarked, "it was the best of times for car dealers, for sure." Isabella Weber argues that the shortage of chips gave existing producers a 'temporary monopoly' where they did not have to worry about new entrants, allowing them to raise prices. ==Transitory vs persistent debate==