The 2021 Inflation Crisis Was Painfully Predictable
In July of 2021, the inflation rate of the US dollar was 5.4%. In June it was 5.4%. In May, 5% and 4.2% in April. Some initially claimed that this was a temporary trend, but it shows no signs of stopping. And now we are reaching crisis levels with gas prices in some areas going as high as $4.70 per gallon. Perhaps the most unfortunate factor in this whole situation is that this outcome was so painfully predictable.
Several key economic factors simply combined into a perfect storm for currency devaluation. As a result of deficit spending, the U.S. Government printed a massive supply of money. At the same time, the coronavirus pandemic crippled supply lines. And finally, the pent-up demand resulting from lockdowns finally broke, putting pressure on supply. This combination of factors will inevitably result in this kind of inflationary trend. And the culprit here is, ultimately, poor fiscal policy from state and federal governments.
On the federal level, the main offender is massive deficit spending. The federal budget deficit for the year 2020 ballooned to 3.1 trillion US dollars, which was roughly equivalent to the entire revenue generated throughout the course of the year. 2021 isn’t looking too great either, with debt on track to be similar to 2020 and with the deficit as of July 2021 up to 2.5 trillion dollars. One major contributor here was the 2.2 trillion dollar CARES Act, which included the Paycheck Protection Program, a plan intended to give loans to small businesses that were struggling as a result of the pandemic. However due to major flaws in the language of the bill, up to 30% of small business owners had a difficult time receiving the loans. Large chain businesses had no problem, however. Companies like Hilton Hotels, Marriott Hotels, Shake Shack, and Fuddruckers received these alleged “small business loans” despite having over 100 locations each.
2021 doesn’t look particularly promising either. Two multiple-trillion dollar infrastructure bills are likely to pass congress, which means that the levels of fiscal irresponsibility will only increase and inflation rates will follow. Injecting this amount of cash into the economy is simply not sustainable.
On the state level, the problem stems from lock-downs. Despite having minimal impact on the spread of COVID-19, many states remained locked down for several months. Some states, like California, have only just opened up recently. These lock-downs have crippled supply lines. While manufacturing and resource extraction ground to a halt, demand did not disappear, and in some cases increased, leading to massive increases in prices for many goods. Lumber, for instance, more than doubled in price from February 2020 to May 2021. Additionally, welfare demand rose, as unemployment rates topped 14%. This resulted in more deficit spending on both the state and federal level to provide for these people who were barred from employment by the government.
