The Inconvenient Truth About the Causes of Inflation

Blame Fiscal Policy, Monetary Policy, Supply Chain Shortages, and More

Inflation and affordability are key issues in the 2024 presidential election. Neither candidate has really proposed policies that will actually address the root causes of the problem. In fact, both candidates are pushing ideas—like tariffs and housing subsidies—that are inflationary. The tariff proposals, though, are uniquely bad because they don’t have to go through Congress. The Executive Branch has unilateral authority to impose tariffs under Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. §§1801) and Section 301 of the Trade Act of 1974 (19 U.S.C. §2411).

A friend texted the other day and brought up inflation. He asked, “Who or what was exactly responsible for the massive inflation hike?” I’ve been thinking about this ever since I got the text, and there’s not an easy or quick answer. I mean, I suppose I could just gesture vaguely at everything. There’s a lot of blame to go around.

Let’s start with the fiscal response to the COVID-19 pandemic. When COVID-19 hit the United States, Congress passed various pieces of legislation that collectively authorized $6.2 trillion in spending. The first four bills passed were the Coronavirus Preparedness and Response Supplemental Appropriations Act, H.R. 6074; the CARES Act, H.R. 748; the Families First Coronavirus Response Act, H.R. 6201; and the Paycheck Protection Program and Health Care Enhancement Act, H.R. 266. These four bills were passed between the beginning of March 2020 and the end of April 2020. Combined, these bills authorized $3.23 trillion. A little more than $3 trillion was actually expended, or a little more than half of the total fiscal response to the pandemic. The deficit impact of these four bills was $2.53 trillion.

Looking at the rest of 2020, Congress also passed other legislation related to the pandemic, including the Consolidated Appropriations Act for FY 2021, H.R. 133. This was the omnibus appropriations legislation passed in December 2020 that included additional COVID relief. The hit to the deficit was $867 billion from that bill alone. By the end of CY 2020, the fiscal response to COVID-19 was $4.18 trillion, with $3.9 trillion of that disbursed. The deficit impact of the fiscal response came in at $3.43 trillion.

Now, Republicans like to blame President Biden for inflation. Let’s be clear. Trump was president in 2020. The budget deficit in FY 2020 was $3.132 trillion, or 14.7 percent of gross domestic product (GDP). This is the largest budget deficit Congress has run up since 1945. The budget deficit in FY 2021 was $2.775 trillion, 12.1 percent of GDP.

Although President Biden was in office for most of FY 2021, Trump was there the first nearly four months of the fiscal year. Of course, President Biden contributed to COVID spending. His biggest contribution was the American Rescue Plan Act, H.R. 1319, which added more than $2 trillion to the deficit. This is why I’ve scoffed at President Biden and Democrats’ claims that the budget deficit declined on their watch. It had nowhere to go but down in the aftermath of COVID-19.

Did this level of spending contribute to inflation? Almost certainly, but it’s not the only cause of inflation. The Federal Reserve’s balance sheet exploded during the pandemic. On August 28, 2019, the Federal Reserve had $3.759 trillion in assets. That slowly began to tick up. On January 1, 2020, the Federal Reserve had $4.173 trillion in assets. On March 4, 2020, the figure was up to $4.241. By April 1, 2020, the Federal Reserve’s balance sheet was $5.811 trillion. By May 6, 2020, it was $6.721 trillion. The Federal Reserve’s assets peaked on April 13, 2022, at $8.965 trillion. Today, the Fed’s balance sheet is down to $7.115 trillion in assets.

What does this mean? What is the Federal Reserve’s balance sheet? It means that the Federal Reserve purchased Treasury securities and mortgage-backed securities to inject money into the economy. If you remember the Great Recession, you undoubtedly heard the term “quantitative easing” (QE).  (Watch this hilarious video for a refresher.) That’s what this was. It’s essentially the monetization of debt to provide liquidity during a deep contraction in the economy. In short, the Fed printed money out of thin air.

As an aside, during the height of the pandemic and the congressional response to it, I recall talking to a good friend who was the legislative director for a House member. I told him that we were living in a world of Modern Monetary Theory (MMT) because of COVID-19 and that Republicans were going along with it. You may remember that from a few years ago. MMT operates on the notion that Congress can spend money without any real checks and manage inflation through taxation. He didn’t disagree.

Another contributing factor was supply chain issues created by the pandemic that led to shortages of goods. Shortages lead to price increases. Some call this “corporate greed” or “price gouging.” In reality, it’s the law of supply and demand. When there’s a limited supply of a product in high demand, the price of that good will rise. This is Econ 101. If there are price controls put into place for a good, those price controls will lead to scarcity. Of course, something like oil and gas prices went up for reasons unrelated to COVID-19. I’ve already gone through that in detail.

I’m sure there are other things I’m not thinking about that I could mention in this post, but you get the idea. The inflation that we’ve experienced had multiple causes—through fiscal policy, monetary policy, COVID-caused supply chain issues, and circumstance completely unrelated to the pandemic—and no single person or entity is to blame. That’s an inconvenient truth for partisans, but I truly don’t care.