Over the past several months, inflation has risen relatively quickly, particularly in contrast to the past decade of exceptionally small price increases. This has led to misplaced calls in some quarters to delay or reduce the scope of federal action to help grow the economy and address the impacts of the COVID-19 pandemic on individuals and families. However, many economists agree that rising prices are tied primarily to global supply problems and inflation will slow once these are resolved. This includes the professional economic forecasters surveyed by the Philadelphia Federal Reserve and analysts at Goldman Sachs who recently issued reports to this effect.
What’s more, the situation for American families and workers will actually improve if President Biden’s Build Back Better agenda passes Congress. In short, as Moody’s Analytics indicated last week, a growing economy — especially one that supports the economic security of families with low and middle income as Build Back Better will do — puts us all in a better position to withstand temporary and likely unavoidable bouts of pandemic-induced higher inflation.
Global supply problems driving inflation
According to the latest data from the US Bureau of Labor Statistics, the cost of living, as measured by the consumer price index, was 6.2 percent higher in October 2021 than the year before. This represents one of the largest increases to the cost of living in the United States in decades. The problem of rising costs is not limited to the US, however, and is at least partly driven by two related forces: pent-up demand after reduced spending and increased savings in 2020 during the height of the COVID-19 pandemic; and the difficulty global suppliers are facing in meeting that demand. Additionally, the cost of fuel, which impacts shipping costs, is being driven higher by the decision of oil-producing countries to restrict supply.
This has led to similarly high inflation in other countries as in the US. For example, Canada, Germany, and the United Kingdom are all seeing inflation at their highest levels in many years. According to figures from the Organization for Economic Cooperation and Development (OECD), inflation in the US is running only slightly higher than the OECD average over the past year.
Some of the price increases in the US may be connected to the labor shortage, especially in jobs with poor working conditions. For example, meat processing plants are struggling to hire enough workers to get food to grocery stores, increasing costs and prices for consumers. Much of that labor shortage could be connected to the meat industry’s history of poor workplace safety, which was highlighted by many outbreaks of COVID-19 over the past 18 months.
Federal relief and rising wages are reducing the impact on ordinary Mainers
While the headline inflation numbers are high, the effect on Mainers appears to be much smaller. According to data from the Census Bureau’s Household Pulse Survey, the share of Maine adults who found it difficult to meet their usual household spending needs has barely changed between early 2021 and now (see Figure 1), despite inflation.
This is partly because federal financial relief has cushioned many families. The American Rescue Plan, passed in March, provided one-time economic relief payments to nearly all Americans. Most parents have been receiving monthly child tax credit payments of up to $300 per child. Other programs such as heating assistance, rent relief, expanded food assistance, and the now-expired expanded unemployment benefits also helped get money to Mainers — in amounts that in many cases far exceeded the impact of the increased cost of goods and services.
What’s more, the need for companies to hire workers has led to a significant increase in wages, especially for many workers with low wage in service industries. As a result, many workers in these industries have seen their wages rise faster than inflation, even with inflation at elevated levels. In other words, many Mainers’ pay checks go further, even after accounting for increased price. The most striking example is in hospitality, where average hourly wages rose from $16.96 per hour in September 2019 to $20.42 per hour in September of 2021. That’s a 20 percent increase — far higher than the 6.9 percent increase in prices over the same period. In fact, average wages have increased faster than the rate of inflation over the past two years in nearly all industry sectors for which data is available (see Figure 2). The notable exception is manufacturing workers, whose hourly wages have barely moved since 2019, perhaps reflecting that supply chain bottlenecks have reduced the demand for workers in this sector.
The Build Back Better agenda will curb inflation over the long run
Fundamentally, inflation occurs when there is a significant mismatch between the supply of goods and services and the demand, which leads to price increases. Since the current period of inflation is largely driven by problems in supply, one way to address the problem is to increase supply. Several aspects of President Biden’s Build Back Better agenda will do just that.
As the White House Council of Economic Advisors notes, the BBB agenda is designed to increase capacity in the US economy over the medium and long term. The recently passed Infrastructure Investment and Jobs Act will invest in road, rail, and port infrastructure to get goods from factories to stores more quickly. Its investments in broadband connectivity will allow more individuals to work remotely and allow businesses to conduct business faster. The second piece of legislation, the Build Back Better Act, will help ease the shortage of workers by improving access to child care and health care, without which many individuals are currently unable to work. An expansion in affordable housing will similarly allow more Mainers to relocate if they need to do so to find work. Both bills contain provisions to combat climate change and reduce dependence on fossil fuels, which will ultimately reduce the price of oil and its contribution to rising costs.
What’s more, because both bills spread their investments over many years, and are almost fully paid for by tax increases on the wealthiest Americans, they will not in themselves contribute greatly to rising inflation.
While the rising cost of living may appear worrying at first, it is important to keep the wider economic context for families in mind. Existing federal relief programs have protected Mainers from the worst of the price increases, and future legislation promises to expand economic capacity and remove the underlying causes of inflation. This reinforces the importance of bold federal action in this time.