What can the government do to stop or slow inflation?

Inflation in the United States rose 8.5% in March, compared with the previous 12 months, marking the largest increase since 1981, according to the Consumer Price Index from the Department of Labor.

Between February and March, inflation rose 1.2%, the biggest month-over-month jump since 2005.

According to several economists and other financial experts, strong consumer demand in the economy – met with weak supply – is the main driver of inflation. The war in Ukraine is also driving up prices, especially of oil and food, they said.

And the government is limited in its interventions, according to experts who spoke to ABC News.

Experts also told ABC News that inflation is likely to be a problem in the coming months, with one even saying they expect it to last for years.

Factors favoring inflation

Consumers traditionally spend most of their money on services, but during the pandemic demand has shifted to goods, Stacy Tisdale, financial journalist and founder of Mind Money Media told ABC News.

“You saw this outage, you saw manufacturers not being able to meet this demand, you saw the challenges that manufacturers were facing, because of COVID, and then you saw the supply chain disruptions. supply. And that’s sort of what’s driving this whole thing,” Tisdale said.

Strong consumer demand not met with sufficient supply is one of the main drivers of inflation, experts said.

“The main factor driving up inflation has been extraordinarily strong demand as consumers have more money in their bank accounts, lower interest rates to borrow at higher stock prices and plenty of money they saved because they didn’t spend much in 2020,” Jason Furman, a Harvard practice professor and former economic adviser to President Barack Obama, who served as chief economist and cabinet member, said .

“That has been exacerbated more recently by things like rising oil prices due to [Russian President Vladimir] Putin’s invasion of Ukraine,” Furman added.

Some experts believe the stimulus funds have exacerbated the increased demand.

“We injected a lot of demand into the economy, especially the US bailout in early 2021, giving everyone $1,400,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at Brookings. .

“And looking back, we’re probably putting too much money in people’s pockets – they want to spend it, but the supply side of the economy is unable to keep up with the rapid increase in demand that’s coming from both fiscal stimulus and people starting to relax about the pandemic,” Wessel said.

Furman said inflation in the United States was worse than in other developed countries, partly because of government stimulus funds.

“The United States has more inflation than any other major advanced economy. Probably because we’ve had a larger fiscal response. No other country has sent checks the same magnitude as we have,” Furman said.

Other experts agree that stimulus payments have contributed to inflation, but say mass distributed payments are not the cause. The government has distributed three rounds of checks to Americans during the pandemic as financial relief, hoping to stimulate the economy.

“You could certainly argue … the stimulus package has definitely helped the inflation rate, but you didn’t have big stimulus packages in Europe. And they’re still looking at 7.5% inflation,” he said. Dean Baker, senior economist and co-founder of the Center for Economic and Policy Research, told ABC News.

The Russian invasion of Ukraine is sending gas prices skyrocketing and raising concerns about crops from Ukraine, which is a major global exporter of wheat, Baker said.

“There are real concerns that much of it will not be planted or cannot be exported. And we have seen a sharp increase in the price of wheat, a number of other agricultural products over the of the past two months or more since the war,” Baker said.

What the government can do

With increased consumer demand being the main driver of inflation, experts said there is little the government can do to fight inflation, but they agree the Federal Reserve should raise interest rates. ‘interest.

“The bottom line is that the Fed raises interest rates and starts selling assets. The goal is to make it more expensive to borrow money to buy a house or a car, or for a business. buy plants and equipment and that will slow demand in the economy, slow economic growth and slow inflation,” Furman said.

“How much it is is incredibly uncertain,” he added.

Baker agreed and said “having zero interest didn’t make sense given the strength of the job market.”

To help bring down oil prices, Baker said if the government committed to supporting the oil market with some effect, it could encourage oil companies, which have been burned by the collapse in oil prices in 2014, to increase production more rapidly.

“It’s fresh enough in people’s minds that they’re hesitant to go headfirst into drilling. So one way to try to counter that is that the Biden administration…could pledge to support the market,” Baker said.

Such a commitment could be that if oil prices fall below a certain amount, the government would buy barrels to replenish the strategic reserve, and therefore support oil prices, Baker said.

Wessel suggested the Biden administration could also repeal Trump-era tariffs, which could lower the price of imports; raise the taxes; or cut spending to drive demand out of the economy.

What’s to come?

Inflation could remain a problem for months to come, but experts disagree on how long it will last.

“I saw signs in [Consumer Price Index] this suggests we may be past the worst, but I expect inflation to be high for at least another 18 to 24 months,” Wessel said.

Furman said inflation could last for years.

“Some of the inflation is probably transitory. I don’t think the real underlying inflation rate in the economy is 8%. But it’s probably not 2 either. And so the Inflation should start to come down a bit, but it’s unlikely to get anywhere near what the Fed wants it to come,” Furman said.

“It could easily stay high for years. We could get lucky and everything could magically disappear. [Or] we could have a recession, which could make it go away. I think the most likely scenario, though, is that it persists for several years,” Furman said.

“People should expect interest rates to rise, so things like mortgages and auto loans will become more expensive. They should expect prices to stay high. They should understand, however, that the labor market is still very , very strong. So there’s a lot of job options out there,” Furman said.

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