Inflation: Economists from Connecticut and beyond on how we got here and where we're going

·9 min read

Jun. 11—The average consumer probably isn't pondering how PepsiCo controls more than 80% of the dip market when they're standing in the grocery store picking up a Tostitos creamy spinach dip for a cookout or Super Bowl party.

But when setting the backdrop for a conversation about the factors in inflation — which economists mainly cite as pandemic-induced disruptions in supply and demand and the war in Ukraine, with dispute over the impact of stimulus packages — lack of market competition is something economist Fred Carstensen can't emphasize enough. He cites the impacts of the United States largely abandoning antitrust policy over the past 40 years.

"In the absence of competition, you're not disciplined," said Carstensen, director of the Connecticut Center for Economic Analysis at the University of Connecticut. "You don't have to cut costs; you don't have to worry about competitors coming in and taking market share away."

He said this is directly relevant to current inflation, because while there are other drivers, big companies can raise their prices because they can get away with it.

With the official measure of inflation at 8.6% but the unemployment rate at 3.6%, the Federal Reserve faces a balancing act: Can the banking system raise interest rates enough to cool inflation but not so much it causes a recession?

The Consumer Price Index for May was up 8.6% over last year and higher in certain categories: 106.7% for fuel oil, 48.7% for gasoline, 16.1% for used cars and trucks, and 11.9% for groceries. Except for used vehicles, the increases for these categories were higher than the year-over-year spikes in April, and inflation is at its highest level since 1981.

Veteran Connecticut economist Don Klepper-Smith, of DataCore Partners, says even Bureau of Labor Statistics figures are an underestimate, as the CPI "doesn't measure the cost of living; it measures the cost of surviving, and barely at that." BLS algorithms that calculate the CPI leave out housing and taxes.

Another historical driver Carstensen cites is the introduction of containerization for shipping, which dramatically cut the cost to unload freight shipped across the ocean. This enabled businesses to source items from all over the world rather than just locally.

But the COVID-19 pandemic disrupted that system, with lockdowns and personnel shortages.

"As we attempted to recover, demand recovered much faster than our ability to supply," Carstensen said, "and so you get this enormous increase in the amount of goods that we're trying to move through the system, and we don't have enough personnel, we don't have enough containers."

Leah Hartman, a finance and economics professor at the University of New Haven, noted that factories in China aren't performing at 100% when the country is under a zero-COVID policy.

Then came Russia's invasion of Ukraine, which rocked the world economy in part because Ukraine is a major supplier of grain and sunflower oil. Hartman said there "is grain sitting there" in Ukraine but getting it safely transported is another matter, and there are also crops and facilities that have been destroyed.

The war in Ukraine also worsened already high gas prices.

When the pandemic hit in 2020, gas prices plummeted as demand decreased, and production capacity decreased. Though restrictions have since been lifted and more people are hitting the road, petroleum refiners haven't caught up to pre-pandemic production.

Russia is one of the world's top oil producers, and countries banning the import of Russian oil also contributed to decreased supply. Russia invaded Ukraine on Feb. 24, and according to AAA, gas prices increased 62 cents from early February to early March, which made up nearly half of the increase from a year prior.

How much of a role do the president and fiscal policies play in inflation?

In George W. Bush's second term as president, 71% of Democrats and 54% of Republicans said in a CBS News/New York Times poll that the price of gasoline is something a president can do a lot about. In Barack Obama's second term, 42% of Democrats and 69% of Republicans said this.

And now, Republican gubernatorial candidate Bob Stefanowski is trying to leverage inflation in his political favor: He has tweeted about "Biden/Lamont inflation" 11 times since mid-May.

Views on the economy have an impact on presidential outcomes, but to what extent does the president impact inflation? The general consensus among economists is: not much.

The Federal Reserve is responsible for the balancing act of trying to adjust interest rates to keep inflation low without sparking a recession, and the Fed is designed to be independent. The Fed in early May issued its biggest interest rate hike in 22 years, and the Fed is expected to raise rates again this week.

In a 2013 paper looking at economic data since 1947, two Princeton University economists found that while the economy performed better under Democratic presidents "almost regardless of how one measures performance," data suggest the gap is not due to macroeconomic policies but to luck.

They attributed 46% to 62% of the gap in GDP growth to Democratic presidents presiding over less harmful oil shocks, better growth in productivity and "more optimistic consumer expectations about the near-term future." They said the rest of the gap remained a mystery and invited other researchers to explore further.

Study authors Alan S. Blinder and Mark W. Watson said the Democrats' growth record couldn't be attributed to better economic conditions when a president took office. But they also couldn't find measures showing people were more optimistic after Democrats were elected.

Blinder and Watson wrote that the only notable exception to the rule of Democrats outperforming Republicans is inflation, where there is no statistically significant difference in performance between parties.

One type of inflation we're seeing now is demand-pull, occurring when an increase in consumer demand causes aggregate demand to outpace supply, often described as too much money chasing too few goods.

"When you start talking about $1.9 trillion stimulus, then that has the opportunity to create substantially more demand," economist Klepper-Smith said. He added that the Federal Reserve has created an "accommodative approach to monetary policy with an extended period of low-interest rates, which now has increased borrowing."

He said both major political parties have played a role in inflation over the past 40 years.

Khai Sim, professor of economics and finance at Eastern Connecticut State University, thinks current inflation is mainly the result of fiscal policies — namely enhanced unemployment benefits and fiscal packages — and the actions of the Federal Reserve.

Former President Donald Trump in March 2020 signed into law the $2.2 trillion CARES Act and in December 2020 signed a spending bill with $900 billion in pandemic stimulus relief. President Joe Biden in March 2021 signed the $1.9 trillion American Rescue Plan Act.

Sim said earlier in the COVID-19 pandemic, people thought the recession would "be a lot longer than what it turned out to be, and the policies are a lot more aggressive than they needed to be." But with the information available at the beginning of the pandemic, he doesn't think there's much policymakers could have done differently, because this was a very different recession than previous ones.

Sim says the impact of the president on inflation is "almost none" and said "people often overestimate how much power the president has on the economy."

And it's not like the U.S. is the only one dealing with this problem: The 19 countries that use the euro for their national currency saw inflation hit 8.1% last month.

In a recently published working paper for the American Enterprise Institute, a conservative think tank, economists looked at inflation across countries with advanced economies.

"Much of the high inflation in the United States is statistically explained by its relatively high inflation in the years preceding the pandemic," authors Steve Kamin, John Kearns and Michael R. Strain wrote. They estimated that a 1 percentage point rise in inflation from January 2017 through December 2019 correlated with a 1.76 percentage point rise in inflation in March 2022.

They noted that inflation in Japan and Switzerland, for example, was low before the pandemic and remained low compared to other countries by this March.

But they also said factors such as changes in job vacancies and "excess saving" during the pandemic "suggest a substantial role for fiscal and monetary stimulus in explaining current U.S. inflation by stimulating demand in labor and product markets."

Where do we go from here?

Now, Sim said, the Federal Reserve is "trying to be very careful, because they don't want unemployment to rise." Theoretically, the Fed could raise interest rates to 10% and inflation would fall to 2%, but he said that would have a "huge disruption in the real economy," meaning employment and production.

Both Sim and Hartman said the easing of inflation will just take time, with Sim saying we need to wait for supply and demand to rebalance and fiscal stimulus to deplete, and Hartman saying inflation is not something elected officials have much ability to control.

Hartman thinks the president has "very little" impact on inflation but can play an important role in messaging, in communicating to the American public that the economy is strong and that when it comes to inflation, "eventually, these issues will smooth out. Eventually the supply chain will be caught up, and we're in a transition from winter gasoline to summer gasoline production, and you don't just flip a switch one day."

Carstensen expects problems in the supply chain to largely disappear over the next year or two.

"Some of the pressures driving inflation are going to take longer to resolve, but we're not facing the kind of OPEC crisis that we had in the early '70s and early '80s," he said. He is also heartened by the Biden administration rediscovering antitrust policy and now challenging mergers and acquisitions.

Klepper-Smith said the large increase in the producer price index, which measures the change in the amount of money domestic producers receive when selling their products, indicates that "inflation is going to be with us for a while. This is not a short-term phenomenon."

e.moser@theday.com