US inflation rose 8.5% in March compared to the previous 12 months, the highest increase since 1981, according to the Labor Department’s CPI.
Between February and March, inflation rose by 1.2%, the largest month-on-month increase since 2005.
According to several economists and other financial experts, high consumer demand in the economy — meeting low supply — is the main factor driving inflation. The war in Ukraine is also driving up prices, especially for oil and food, they said.
And the government’s ability to intervene is limited, according to experts speaking to ABC News.
Experts also told ABC News that inflation is likely to be an issue in the coming months, with one even saying they expect it to persist for years.
Factors driving inflation
Consumers traditionally spend the bulk of their money on services, but during the pandemic demand shifted to goods, Stacy Tisdale, financial journalist and founder of Mind Money Media, told ABC News.
“You’ve seen this collapse, you’ve seen manufacturers not being able to keep up with this demand, you’ve seen the challenges manufacturers have had due to COVID, then you’ve seen the supply chain disruptions. And that’s what underlies all of this,” Tisdale said.
People shop at a clothing store in Manhattan on April 4, 2022 in New York City.
According to experts, strong consumer demand that is not met by sufficient supply is a key driver of inflation.
“The biggest factor driving inflation has been extraordinarily strong demand as consumers have more money in their bank accounts, lower interest rates on loans at higher stock prices, and a lot of money they saved because they didn’t have much in 2020 have spent. said Jason Furman, a professor of practice at Harvard and a former top economic adviser to President Barack Obama, who served as chief economist and a member of the cabinet.
“This has been exacerbated lately by things like higher oil prices due to [Russian President Vladimir] Putin’s invasion of Ukraine,” Furman added.
Some experts believe stimulus money has exacerbated increased demand.
“We pumped a lot of demand into the economy, especially the US bailout plan in early 2021 that gave everyone $1,400,” said David Wessel, director of Brookings’ Hutchins Center on Fiscal and Monetary Policy.
“And in hindsight, we probably put too much money in people’s pockets – they want to spend it, but the supply side of the economy is unable to cope with the rapid increase in demand driven by both fiscal stimulus and comes the fact that people are starting to relax about the pandemic,” Wessel said.
Furman said inflation in the US is worse than in other developed countries, in part because of government stimulus money.
“The United States has higher inflation than any other major advanced economy. Probably because we’ve had a bigger fiscal response. No other country has sent checks like we have,” Furman said.
Other experts agree that stimulus payments have contributed to inflation but say the mass distribution of payments is not the cause. The government has handed out three rounds of checks to Americans as financial relief during the pandemic in hopes of stimulating the economy.
“You could certainly argue … that the stimulus package definitely contributed to the rate of inflation, but you didn’t have any big stimulus packages in Europe. And they’re still looking at 7.5% inflation,” Dean Baker, a senior economist and co-founder of the Center for Economic and Policy Research, told ABC News.
A gas pump displays current fuel prices at a gas station in Arlington, Virginia on March 16, 2022.
The Russian invasion of Ukraine is “pushing up” gas prices and raising concerns about the crop from Ukraine, which is a major global exporter of wheat, Baker said.
“There is real concern that much of it is not being grown or cannot be exported. And we’ve seen a sharp rise in the price of wheat and a number of other agricultural commodities in the last two months or so since the war,” Baker said.
What the government can do
With increased consumer demand being the main driver of inflation, experts say there is not much the government can do to fight inflation, but they agree the Federal Reserve should raise interest rates.
“The main thing is that the Fed hikes interest rates and starts selling assets. The goal is to make it more expensive to borrow money to buy a house or car, or for a business to buy plants and equipment. And that will cool demand in the economy, slowing economic growth and slowing inflation,” Furman said.
“How much of that it does is incredibly uncertain,” he added.
Traders work as Federal Reserve Chairman Jerome Powell makes remarks on a screen at the New York Stock Exchange (NYSE) on March 16, 2022 in New York City
Baker agreed, saying that “zero interest rates made no sense given the strength of the job market.”
To bring down oil prices, Baker said if the government commits to providing some support to the oil market, it could encourage oil companies, burned by the 2014 oil price collapse, to ramp up production at a faster rate.
“This is fresh enough in people’s minds that they are hesitant to jump headfirst into the wells. One way to counter this is for the Biden administration to…might make a commitment to support the market,” Baker said.
One such commitment could be that if the price of oil falls below a certain amount, the government would buy barrels to replenish the strategic reserve and thus prop up oil prices, Baker said.
Wessel suggested the Biden administration could also remove Trump-era tariffs, which could depress import prices; Increase taxes; or cut spending to drive demand out of the economy.
What’s coming?
Inflation could remain an issue in the coming months, but experts disagree on how long it could last.
“I saw some signs in the [Consumer Price Index] that suggests the worst may be behind us, but I expect inflation to be high for at least 18 to 24 months,” Wessel said.
A for sale sign sits outside a home in Mount Lebanon, Penn. on September 21, 2021. US long-term mortgage rates continued to rise this week, Thursday, April 14, 2022.
Furman said inflation could linger for years.
“Some of the inflation is likely temporary. I don’t think the underlying true inflation rate in the economy is 8%. But it’s probably not 2% either. And so inflation should come down a bit, but it’s unlikely to get anywhere close to where the Fed wants it to be,” Furman said.
“It could easily remain high for years to come. We might get lucky and it might all just magically disappear. [Or] we could have a recession that could wipe them out. However, I think the most likely scenario is that it lasts for several years,” Furman said.
“People should plan for higher interest rates so things like mortgages and car loans will become more expensive. You should expect prices to remain high. However, you should understand that it is still a very, very strong job market. So there’s a lot of job opportunities out there,” Furman said.