The government (via COVID relief spending as well as through the Federal Reserve) has injected a lot of money into the economy since 2020. An obscene amount actually. That means there are more dollar chasing the same amount of goods and services. Prices will rise as a result. In addition supply chains have been affected by lockdowns which means less supply relative to demand. This too means that prices will rise. It's fair to say the latter part has been transitory. But labor shortages, and ricing prices of commodities necessary to produce goods mean that that part may be less transitory than expected. And as for the "money printing", well that is real, and a real problem.
Via the Wall Street Journal:
Compared with two years ago, overall prices rose 3% in June. Overall prices jumped at a 9.7% annualized rate in the three months ended in June, on a seasonally adjusted basis, faster than the 8.4% pace in May.
This inflation is likely to lead to shortages, like there was for gasoline in 1973. It will certainly lead to pressure for higher wages, as inflation likely eats up the real wage gains made under president Trump. Rising wages will lead to another cycle of upward price pressure and more inflation. This is not going to be transitory if by that economists mean 2021. This problem is likely to persist for a few years. It also risks becoming a lot worse than it currently is. The way to combat inflation is to reduce demand. Lower demand coupled with lower supply means a new equilibrium potentially at a similar price point but with lower quantities of sales (and therefore a lower GDP). That's basic economics.
But to lower demand requires increased savings which can typically only be accomplished through higher interest rates. It's a painful medicine. mortgage rates go up as a result, as do loan rates, credit card rates. It can lead to a lot of bankruptcies for overextended consumers. But here's the thing, the government itself can no longer afford higher interest rates because it owes so much money to lenders due to deficit spending. Which means the government itself faces hard times with higher interest rates. It can't afford it either. It may have to leave rates lower, which means inflation could go unchecked.
Expect harder times ahead.
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