Inflation is being caused by a perfect storm of economic factors, according to Thomas Barkin, president of the Federal Reserve Bank of Richmond.
Barkin spoke about inflation to the Prince William Chamber of Commerce on Sept. 30.
The economy has recovered from some of the effects of the recession caused by the COVID-19 pandemic, Barkin said. He pointed to increased employment levels and growing gross domestic product numbers.
Some economists have indicated the U.S. is in another recession, but Barkin said the strength of the labor market makes those assessments “premature.”
Barkin did note that supply chain issues, labor shortages and the war in Ukraine continue to hamstring the market as inflation reaches 40-year highs.
On labor shortages, Barkin said the issue was at first sick or quarantined workers. However, the problem has ballooned as immigration dropped, retirements moved forward and people had more child and elder care responsibilities holding them out of the workforce.
Barkin said inflation isn’t for the most part being fueled by stimulus packages because a lot of that money hasn’t been spent.
“Americans still have an estimated $1.5 trillion in excess savings, state and local governments still have billions to tap, and the infrastructure package will take years to roll out,” he said. “So, it is hard to pin inflation entirely on stimulus-fueled demand.”
Barkin said the Federal Reserve was slow to take steps around interest rates because “we believed inflation was temporary.”
“History taught us not to overreact to short-lived supply shocks. It usually doesn’t make sense to constrain the economy to fight a shock that will go away on its own. But inflation didn’t fade as we had expected,” he said. “With perfect hindsight, it would have made sense to have ended asset purchases and raised rates earlier, but sick workers would still have had to stay home, car manufacturers would still have been short chips, Russian oil and Ukrainian wheat supplies would still have been disrupted.”
Barkin said inflation has been driven by all aspects of the economy, from COVID-19 to supply shortages to fiscal and monetary policies.
He said businesses struggling with supply issues passed costs onto consumers, who mostly accepted the increases because of stimulus funds. Workers then negotiated a tight labor market for flexibility and wage increases.
“In short, businesses constrained by a generation of limited pricing power seized the opportunity that arose,” he said. “Workers emboldened by unprecedented labor market tightness did the same. We all started paying attention.”
So, what happens next? Barkin said it’s not time to panic.
He said COVID-19 is “moving into the rearview mirror” and supply shortages are easing, but it’s hard to pinpoint just how long the current economic situation will last.
“One of the key lessons from the ‘70s was not to declare victory prematurely,” he said. “Perhaps we will get help from supply chain and energy market normalization. But we have the tools to bring inflation down, even if those disruptions continue.”