At a recent lunch with some of my colleagues, our discussion turned to the topic of the inflation that has developed in the US economy over the past year. I am sixty-one years old while my lunch companions were in their 40’s and 30’s. I was surprised to see their lack of knowledge and concern about inflation, but perhaps I shouldn’t have been. They have had no experience with inflation in their adult lives. As I regaled them with tales of woe from the 1970s and early 1980s, I also shared the story of how inflation was seen as “Public Enemy Number 1” and recounted the Whip Inflation Now program that was started by President Gerald Ford in 1974 (including WIN buttons for people to wear). They had never heard of it.
As measured by the change in the Consumer Price Index, the US inflation rate was 7 percent for the year 2021, which was the highest it had been in almost 40 years. The change in the Producer (or Wholesale) Price Index, which is often seen as a harbinger of future inflation trends, came in at 9.7 percent for the past year. As I attempted to get my friends to be more concerned about the very negative consequences that inflation can have on an economy, I tried out with them a new idea that I had been thinking about for a while. “Inflation is the enemy of justice,” I said. The ensuing conversation led to this blog post today.
First of all, why is inflation so bad? Inflation hits everyone throughout the economy, making all of our income and savings less valuable. It is hard to avoid as it generally strikes almost all sectors of the economy. You may have noticed it most at the food store, the gas station, local restaurants, online, or at the local mall. My colleague noticed it when the price of a soft drink went from $1.50 to $2.00 in our building’s vending machine. Products that we purchase might come in smaller packages even though the price is higher. Businesses face inflation, too, and have to pay higher prices for their supplies.
Second, inflation can last for a long time once it gets going. The inflation that germinated with excess government spending in the 1960s lasted all the way into the 1980s (us older folks remember!). Inflation is persistent because of what economists call the wage-price spiral. As prices increase, workers see their purchasing power decline. Naturally, they demand higher wages and salaries. If and when businesses pay their workers more, these increased costs lead to higher product prices which fuel further inflation. Workers need further increases in pay just to keep up, and the cycle continues.
Third, inflation is very hard to remove from an economy. After more than a decade of inflation and a bout of stagflation (high inflation and high unemployment together) to boot, severe inflation was finally suppressed in the early 1980s when the Federal Reserve (the Fed–our central bank) repeatedly raised interest rates, which led to mortgage rates of over 18 percent. The US went into a deep recession with unemployment rates that reached nearly 11 percent. At that time, dealing with inflation caused this nation’s most significant economic slowdown since the Great Depression. Although it was a costly solution, inflation remained under control for nearly the next forty years.
But why is inflation an enemy of justice? Most discussions of economic justice focus on the impact of any policy prescriptions on the poorest members of our society. This is right and good. It is not necessary to search for proof texts, as one of the central messages of the Bible is God’s concern for the poor. However, it is good to remember that our Lord has said that “Truly I tell you, whatever you did for one of the least of these brothers and sisters of mine, you did for me (Matthew 25:40).” Proverbs 14:31 reminds us that “He who oppresses the poor shows contempt for their Maker, but whoever is kind to the needy honors God.”
For a variety of reasons, the negative effects of inflation have a disproportionate impact on the poor. Those who are impoverished spend a larger proportion of their income, which means that they are less shielded from the effects of inflation; wealthier people generally save more of their income. Not surprisingly, those who are poor also spend a higher proportion of their income on necessities and have a lower ability to move their purchases around to items where higher prices may be less prevalent. In addition, poorer families have a smaller pool of resources to draw on to deal with inflationary pressures, while those with savings can call on these assets to weather the impact of higher prices (including stocking up on products when their prices are lower). For the rich, inflation may also lead to increases in the prices of real estate holdings and overall household wealth—the poor are much less likely to have such assets. Poorer individuals are also more likely to receive income from the informal sector of the economy, where it might be more be difficult to obtain increases in income than in more regulated areas of the labor market.
Inflation also has negative consequences that move throughout the entire economy, which can impact poor families. One consequence of higher inflation is higher interest rates, making it more difficult to borrow. In addition, as recounted above, a typical remedy for inflation is a policy of higher interest rates for the economy, making this problem even worse. The Fed has already committed to raising interest rates this year. Inflation also creates uncertainty for businesses and banks, which impacts those at the margins the most when additional jobs are not created and when borderline loans are not extended. Because we have had so little experience with inflation over the last several decades, it is easy to forget how much inflation can disproportionately impact the poor, what some economists now call “inflation inequality.”
The last two years were a time of unprecedented government spending as we dealt with the effects of the pandemic. In early 2020, unemployment rates shot up to over 14%, the highest level since the Great Depression. Much of the spending was justified, but a significant portion of it could be seen as excessive. The budget deficit was 3.13 trillion dollars for the fiscal year 2020, 2.77 trillion for 2021, and is projected to be 1.2 trillion dollars for 2022.1 This is without the impact of any additional spending plans that might (or might not) pass Congress during this year.
Although the pandemic still persists, most economic conditions (save for inflation) have now returned closer to normal. Our unemployment rate was 3.9 percent in December, near its 50-year low of 3.5 percent that occurred in September of 2019. Our economy grew (as measured by GDP) by 5.7 percent in 2021, the largest increase in more than three decades. As we design economic policy for the coming years, we will have to be particularly cognizant of the effects of inflation. Almost every economist will acknowledge that too much spending in an economy near full employment leads to inflation, and that inflation can become a persistent problem that is quite difficult to root out. We should also be very cautious about any political rhetoric that suggests that major new spending programs are “fully paid for.” This has infrequently been the case in the past. The evidence for this can be found in our near 30 trillion-dollar national debt.
When exercising good stewardship, families know that not every possible spending item that sounds good is one that they can afford. There are constraints, and they have concerns about future generations and future possibilities. Our history of government spending shows that the government does not always follow this same logic. We do not want to pass on excessive debt to future generations, nor do we want to have to deal with inflation for a decade or more.
Inflation can have a particularly negative impact on the poor and is a factor over which they will have very little control. Every single poor family will be impacted by higher levels of prices in the economy. Inflation is indeed an enemy of economic justice. If we desire to “build back better” from the impact of the pandemic, inflation should not be part of the program. Given everything we have been through over the last two years, I would love to be able to tell you that inflation is an issue that we do not have to worry about until later, but it is already here in earnest. We need to be very cautious about throwing more fuel on the fire.
- www.pbs.org/newshour/economy/u-s-government-deficit-down-17-from-same-period-a-year-ago, accessed January 30, 2022.