President Joe Biden hopes his $1.9 trillion stimulus act has Americans repeating a word they’ve longed to speak for more than a year: recovery. It could also have them saying one they haven’t said in a long time: inflation.
Inflation is normally a result of too much money chasing too few goods. That’s not to say that price increases cannot result from other causes. That’s one reason central banks often look at what they call “core inflation,” which strips out price levels for volatile sectors such as food and energy to assess whether an economy is suffering from sustained inflation. In general, increases in prices across the wide basket of consumer goods are the result of dramatic and continued increases in the supply of money.
That’s exactly what happened in the past year. The succession of government stimulus packages to combat the covid-19 pandemic has increased the broad supply of money in the United States from $15.5 trillion in February 2020 to a whopping $19.4 trillion in January. That is a record one-year increase, according to statistics from the Federal Reserve Bank of St. Louis. Biden’s billions will come on top of that.
This has not caused inflation so far because people have largely saved the money rather than spent it. The personal savings rate — the percentage of income that people save rather than spend — has skyrocketed during the pandemic, up from a pre-pandemic average of around 7% to as high as 34% last April. Most Americans will already be sitting on oodles of cash when Biden’s new $1,400-per-adult checks hit their bank accounts.
What Americans decide to do with this money will determine whether we experience a burst of inflation in the coming months. Some of the money will clearly be spent on buying things the pandemic has artificially suppressed, such as vacations and dining out. That will go to expanding economic activity rather than automatically increasing prices. But people who are flush are also less likely to closely consider costs. A pandemic-weary population may be even less inclined to shop for bargains. If that happens, prices could easily soar as consumer confidence returns.
Independent reporting for Pine Bluff & Jefferson County since 1879.
That’s what’s already happening with housing prices and gasoline. Zillow estimates that housing prices increased 10% last year and expects them to go up another 11% this year. That could be a low estimate, as the rate of increase last year spiked a couple of months after the first stimulus checks arrived. The price for a gallon of gasoline is also rising fast, up by more than 10% in just the past month and more than 30% from a year ago. Prices will likely continue to increase as more people start to drive to work and go on summer vacations. The money supply has risen dramatically elsewhere, too, including the European Union and Britain. Global consumers are sitting on the same piles of cash as U.S. consumers, with many facing even greater restrictions on their ability to spend it. Once they are vaccinated, the temptation to go on a spending spree will be enormous.
The world should look to Israel to see what the future might hold. That tiny nation has experienced three national lockdowns while increasing its money supply by more than 20% during the pandemic. Israel is also the world leader in vaccination, with nearly 60% of the population already receiving at least one shot. Israeli unemployment is much higher than elsewhere, standing at 19.5% last month, so putting people back to work will be the first effect of economic reopening. If prices start to jump rapidly once the economy is back on its feet, however, that would be a sign that the United States could suffer a similar fate later this year.
Henry Olsen is a senior fellow at the Ethics and Public Policy Center.