The Fed
The nation’s central bank has kept ultra-easy monetary policy in place for far longer than in past economic cycles. Its chair, Jerome Powell, has focused on returning the job market to full health and has projected that the inflation surge is temporary.
His response in large part took from the lessons of the last economic expansion, when the Fed started raising interest rates at the end of 2015 and, with hindsight, might have excessively crimped a recovery that was only starting to show big benefits to workers.
But Powell and other policymakers might be fighting the last war. At a minimum, the Fed has not played its traditional role of pre-empting an inflation surge by deliberately slowing the economy.
That said, monetary policy takes a long time to affect consumer prices, so it’s not a given that the inflation situation would be terribly different now if the Fed had started raising rates already.
Corporate America
When the pandemic shut down the world in 2020, operations managers at companies concluded: We need to do whatever we can to survive.
Automakers saw it as a severe recession and cut back production and orders for new supplies, while car rental companies sold their fleets. Airlines canceled orders for new jets. Energy companies canceled drilling projects. Companies in a range of industries laid off workers.
We’re still dealing with the effects of those decisions. This turned out to be a much shorter economic downturn, with a much speedier recovery, than many people were forecasting in the spring of 2020. So now, automakers are wishing they hadn’t canceled orders for semiconductors, car rental companies are struggling to add vehicles, shipping prices are through the roof, fuel prices are spiking, and companies are wrestling with labor shortages.
What seemed like prudent, sensible decisions turned out to be wrong for the actual economy we ended up with.
Despite all that, however, supplies of many goods actually are higher than they were before the pandemic. The problem is that demand is up even more.
Signing bonuses on offer in Miami Beach, Fla., this month.Credit...Joe Raedle/Getty ImagesAll of us
Though everybody experienced the pandemic differently, in the aggregate a couple things are true.
We shifted our spending toward stuff, rather than services. Americans purchased 18 percent more physical goods — cars, washing machines, furniture — in September than they did in February 2020, while their consumption of services fell a bit. Because demand for such goods is off-the-charts high while supplies are limited, they are more expensive.
And many of us elected to stop working, or work less. (The number of people working remains smaller than it was prepandemic.) The shortage of workers has led employers to offer higher wages to attract employees. That fuels price increases even in services experiencing underwhelming demand, like restaurant meals.