Most Americans have noticed how expensive things have become over the last year or so. New and used cars are incredibly pricey now. Food is more expensive than it used to be a year ago. Rents have increased. Energy, particularly gasoline, is sky-high. Was all or some of this inflation caused in some way by COVID-19?
Inflation 101
In layman’s terms, inflation is the rise in prices. Sometimes prices rise slowly, in other times they rise quickly. When prices rise at a fast pace across the board, it is referred to as inflation, which simply means that your dollars buy less than they used to.
Recent Price History of Typical Items Americans Buy
To drive the inflation concern home, let’s look at some price increases that Americans have had to deal with: As of February 22, 2022, gasoline is averaging $4.06/gallon; a year ago it was $3.02/gallon. Look at automobile prices: The average price rose just under $1800 in 2019, then just over $3301 in 2020, and then an incredible $6220 in 2021.
The Root Cause of Inflation
Numerous people, especially politicians of late, have offered opinions on the causes of inflation. Turn on the nightly news and you’ll hear things like this: “Supply chain issues are causing inflation”, or “Meatpackers are causing inflation.” Because inflation is hurting the average American, it appears to many that people in charge of the country or in the media are desperately trying to find convenient scapegoats.
Perhaps it is better to look at inflation more objectively. Milton Friedman may have said it best: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
If Friedman is correct, then flooding the economy with money is the root cause of inflation. Numerous other factors, such as supply chain constraints or COVID-19 can make the problem worse, but they are not the root cause.
The COVID Effect
The COVID pandemic has had a major impact on American lives and on the welfare of people across the globe. Leaders in numerous countries have attempted to mitigate its spread by imposing lockdowns and other measures that have put people out of work and stressed the economy in other ways as well.
This has indeed caused numerous problems in the availability of goods and services and caused many people to lose their paycheck. As bad as these circumstances are, they are not part of the root cause of inflation, but clearly exasperate it for many.
The response of many governments, including that of the United States, during the last few years of the pandemic, has, however, directly ignited a rise in inflation. This is because a tremendous amount of money has been injected into the system by our government. In the United States, massive spending bills enacted by Congress since the Biden administration came into power as well as the COVID relief payments that most Americans received have flooded the economy with dollars.
If Friedman is correct, massive government spending may indeed be the principal mechanism that let the inflationary genie out of the bottle. It wasn’t COVID, but the government’s response to it that has apparently ramped up recent inflationary pressure.
