I usually write my own essays for this newsletter. However, I subscribe to several other Substack newsletters, and one written by an economist, Tim Murray, got my attention a couple of weeks ago. In the (long) newsletter, he explains the various forces that contribute to inflation. Since we all experience inflation, and since none of us like it, we are always talking about the causes of price increases and looking for someone to blame. In this essay, Dr. Murry addresses these questions and more. (NOTE: Since the original publication of this essay, inflation has eased a bit. The analysis is still applicable.)
Here's the link to his newsletter. You should read it.
He begins by explaining why inflation occurs:
There are two ways in which a country can experience inflation:
Demand-Pull Inflation is when people want to buy more of a product than companies can produce, thus driving up prices
Cost-Push Inflation is when the costs of production (e.g., raw materials and wages) increases and drives up prices
In the past, when the United States has seen an elevated inflation rate, it is typically due to demand-pull inflation because the economy is strong and people want to buy more than companies can produce. The increase in demand for products drives up prices. In the 1970s, the United States experienced Cost-Push inflation due to the OPEC oil embargo, which increased the price of transportation and raw materials.
The current elevated inflation rate is unique, because the United States is experiencing both Demand-Pull and Cost-Push inflation. In this article, I will talk about both types of inflation as well as elevated gasoline prices.
His article has three substantive sections:
The Economy is Strong
Supply Chain Issues Persist
Price of Gasoline
His fourth section contains his conclusions (Final Thoughts), and I’m laying it out here so you can see his overall point:
The worldwide economy is facing new challenges as countries recover from the COVID-19 pandemic. It is easy to look at what is going on in the United States as isolated, and place blame on specific people or political parties. However, there is no one person or political party to blame. High inflation is not a problem that is unique to the United States. Figure 16 shows that all major countries are experiencing higher than normal cost-pull inflation because of the supply chain issues.
The United States is slightly higher because we are experiencing more demand-pull inflation due to a strong economy. The United States has had a robust recovery from the pandemic because of the economic stimulus that was provided. It is possible that too much stimulus was provided, which is causing the economy to overheat, that is something we will not know until more time has passed and data become available. I do think it was better to err on the side of caution and that too much stimulus was better than too little. The effects of financial ruin that could have happened to many families during the pandemic would have had a much greater long-term negative impact on the economy than a period of higher inflation, which can be driven down by the Federal Reserve.
The Federal Reserve will continue to increase interest rates in an effort to slow the economy and curb demand-pull inflation. However, inflation will remain elevated until supply chain issues are fixed, as more than half of current elevated inflation is being driven by supply issues.
Economics is complicated. Dr. Murray’s essay is not for the faint of heart, particularly if you don’t like charts and graphs. If you’re a nerd, you’ll like this (I’m talking to you, Anne). But it is worth your time and attention.
Great article by Tim Murray. I even understood it. And I liked the nerdy bits. Thanks for a new substack.