Rutgers University–Camden public policy expert Michael Hayes maintains that inflation today is rooted in the substantial increase in the money supply starting in March 2020 – a direct response by Congress and the Federal Reserve to mitigate the negative economic shocks caused by the pandemic. For instance, Congress passed various economic stimulus packages that provided loans to businesses and stimulus checks to households. Meanwhile, the Federal Reserve Bank set the federal funds rate to zero with the goal of stimulating business investment and economic growth. “As a result, the total amount of currency and saving deposits held by the public – commonly referred to as M2 – increased by more than 35% between March 2020 to December 2021,” said Hayes, associate professor of public policy and administration in the College of Arts and Sciences at Rutgers University–Camden.
Unfortunately, Hayes posits, it was impossible for policymakers to know the exact time to end these fiscal and monetary policies. As the economy and society started to open starting in 2021, businesses and households started to dramatically increase their demand for various goods and services, but the supply couldn’t keep up with demand. “As a result, the overall price levels for these goods and services started to rise to historically high levels,” Hayes said.
Initially, Hayes continues, inflation was only impacting the prices of durable goods, such as automobiles, major appliances, and home food purchases. However, since the beginning of 2022, there have been significant price increases for energy, healthcare, and shelter – a sizable portion of the typical household budget. The Federal Reserve Bank now expects the annual growth in consumer prices to come down to about 4% before the end of 2023. “However, this assumes there will be no major supply chain disruptions and no additional geopolitical conflicts in the world,” Hayes said.
Hayes further notes that households in the lowest income group are the most negatively impacted by inflation for at least three reasons. First, the typical low-income household spends all of their disposable income on goods and services, whereas higher income households tend to save a non-trivial amount of their disposable income. Secondly, low-income households have less income to buy items in bulk to take advantage of lower unit prices for bulk purchases. Lastly, low-income households have less access to credit and lower levels of savings to help mitigate the effects of inflation on their household budgets.
Hayes agrees with the Federal Reserve’s actions to increase the federal funds rate to discourage business investment and household spending. The federal funds rate increases the cost of borrowing money, affecting higher mortgage interest rates, credit card interest rates, and corporate bond interest rates, among other things. Businesses will be less likely to hire more workers, which will ease the tightness in the labor market. At the same time, higher saving rates will encourage households to save more of their disposable income in lieu of spending it on goods and services. “These economic decisions by businesses and households will lower the growth in wages and demand for goods and services in the economy,” Hayes said. “With less demand for workers, goods, and services, increases in prices and overall inflation is expected to subside.”
Hayes adds that inflation will likely increase government deficits. For example, federal social security payments will increase by almost 10% this coming fiscal year because the payment amount is indexed for inflation. At the same time, the income thresholds for federal tax brackets will increase because these brackets are adjusted for inflation. This means many households will fall in lower tax brackets that tax income at a lower tax rate. “The federal government will therefore receive less revenue and will have higher expenditures due to inflation,” Hayes said.
“Inflation is simply too much money chasing too few goods and services,” said Andrei Nikiforov, clinical assistant professor with Rutgers School of Business–Camden. But inflation isn’t always a bad thing. “Stable, mild inflation stimulates people to invest in long-term projects to protect their savings and results in extra economic activity,” said Nikiforov. When inflation spikes, however, problems within the economy can surface.
Inflation can be the result of economic circumstances, but it can also be affected by other factors, such as supply chain disruptions, labor shortages, and geopolitical issues.
“The explanation for current inflation is relatively simple,” said Nikiforov. “The Federal Reserve, which is responsible for money supply in the United States, and Congress printed a lot of money to support the American economy during the pandemic, filling consumers' wallets over and above the usual levels.” He noted that this led to increased demand that could not be met due to restrictions put in place due to the pandemic, and the Russia-Ukraine war exacerbated an already tenuous economic situation.
While the outlook remains uncertain, there is reason to be hopeful that the economy will start to stabilize through 2023. “The consensus right now is that the actions taken by the Federal Reserve – i.e., increasing the interest rate every few months – will lead to a short but mild recession at some point in 2023,” said Nikiforov. “The typical lag time from the implementation of a policy to the real-world effect is 12 to 18 months. Since the Federal Reserve started actively raising interest rates on March 17, 2022, a recession could occur anywhere between March and September of 2023,” he said. But there is a silver lining. “The recession will rebalance the scales between the supply and demand and prepare the economy for the next decade of steady expansion.”
Millions of Americans struggle to afford prescription medications each month due to rising prices, according to the Department of Health and Human Services (HHS). A recent HHS report found that 1,216 drugs saw price increases averaging 31.6 percent (compared to the inflation rate of 8.5 percent) between July 2021 and July 2022.
“Patients have told me they take doses smaller than ordered or have skipped doses entirely to make the medications last longer,” said Jennifer Sipe, a nurse practitioner and clinical associate professor at the Rutgers School of Nursing–Camden. “I have also ordered medications and the patient never filled the prescription due to high costs.”
Sipe attributes this surge to a combination of factors—mergers and acquisitions among drug companies resulting in fewer competitors, “patent extension” tactics by which brand name pharmaceutical companies pay generic manufacturers not to enter the market, and the costly nature of research and development. These factors, she said, have been exacerbated by supply chain issues like raw material shortages, production delays, and workforce deficiencies.
High drug prices disproportionately affect low-income, people of color who are less likely to carry private health insurance yet experience higher rates of conditions like diabetes, heart disease, and cancer, Sipe said. For these patients, the monthly cost of medication—compounded by expenditures like copays, diagnostic testing, medical equipment, and more—can be insurmountable.
“Every one of my patients has good insurance. If this is affecting my middle-class segment, it is devastating low-income families who must choose between medication and food,” said Sipe, who adds that access to certain medications can mean life or death, translating to higher mortality rates among these communities.
While it is far too early to see an impact from the Inflation Reduction Act of 2022—under which pharmaceutical companies that raise the price of their products beyond the rate of inflation are required to pay rebates to Medicare—Sipe is hopeful that this legislation will pave the way for other reform bills that seek to reduce the burden of disease and fight systemic health inequities.
“It is opening the door to something that’s very different in this country, which is negotiation,” Sipe said.
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