Gene J. Puskar/AP Photo
A help wanted sign hangs on the door of a Target store in Uniontown, Pennsylvania.
The usual suspects have been pointing to signs of inflation as a way of claiming that the Biden relief payments have been overheating the economy. This is complete malarkey. Happily, even the Federal Reserve is shooting down this nonsense.
The source of the alarm was the May report of the Labor Department that the Consumer Price Index had increased by 4.2 percent if you compare prices in April 2021 with April 2020. The “core” number, which excludes volatile food and energy prices, was up 3 percent.
This report followed an April CPI report that showed a year-to-year increase of 2.6 percent. The two taken together suggested that inflation might be accelerating.
The reason why this is not worrisome is that prices are basically rebounding from a deeply depressed base in the pit of the COVID recession a year ago. In March 2020, before the recession hit, core inflation was running at an annual rate of just 1.5 percent, or well below the Fed’s target rate.
As EPI’s Josh Bivens puts it:
Even several years of inflation above 2% would still not make up for years of too-slow price growth over the past 12 years, and making up for these years of too-slow price growth would go a long way toward reestablishing the credibility of the Federal Reserve inflation target. This is an opportunity, not a threat.
It’s true that there have been some sectoral price hikes that reflect factors that are not fundamentally macroeconomic, such as increases in the cost of Canadian lumber; or price changes resulting from the shortage of computer chips; or rises in housing prices reflecting scarcity and decades of bad housing policy.
But these are exactly the kind of sectoral price fluctuations that do not respond to the premature dousing of a recovery—which was the draconian remedy imposed by the Fed in the late 1970s, when inflation was real.
The lack of overheating is also reflected in the dismal rate of job creation. Only 266,000 jobs were created in April, according to the Bureau of Labor Statistics. And the number of net U.S. jobs lost since February 2020 is still 8.2 million.
In April, despite all the relief and recovery spending, the unemployment rate actually increased (to 6.1 percent), as people started rejoining the labor force and looking for jobs. We are very far from the full employment that generates serious inflationary pressures. Wage growth is still far below trend—and the post-2008 trend was nothing to brag about.
And speaking of jobs, conservative politicians and commenters have had a field day, contending that overly generous unemployment compensation benefits on top of income supports such as the Child Tax Credit leave many workers concluding that they’d rather stay home than take available jobs. The right-wing press runs articles showing that employers offering good jobs find no takers. In several states governed by Republicans, officials are refusing to take the federal supplemental unemployment benefits for workers.
Meanwhile, Amazon runs ads touting its $15 minimum wage, and other low-wage employers are following suit.
It’s important to unpack what’s at work here. To the extent that increased social benefits and tightening labor markets are compelling employers to pay at least $15 an hour to find willing workers, that’s exactly the objective. We are still nowhere near the point where decent wages for workers will trigger accelerating inflation.
And to the extent that better-paying jobs can’t find workers, that challenge makes the case for targeted training programs (and not for outsourcing or special visas for indentured foreign workers).
In short, the package of recovery measures is beginning to do just what was intended. The inflation story is a fake. So is the story of spoiled low-wage workers staying home.
If we stay the course with Biden’s recovery plans, workers might actually see long-overdue raises—and consumers needn’t worry about higher prices.
