What is Causing High Inflation in the U.S.?
A recent analysis from Moody's Analytics sheds light.
by Lawrence M. Eppard
Reliable analyses of what is causing price increases in the U.S. are necessary in order for us to take effective action. Last week, the chief economist at Moody’s Analytics, Mark Zandi, broke down potential main drivers behind May’s significant inflation numbers.
This is of course only one analysis, and there seems to be significant disagreement among economists about the relative importance of different factors in causing current inflation. Steven Rattner and Larry Summers, for example, argue that the Biden administration’s $1.9 trillion American Rescue Plan (ARP) played a more significant role than Zandi’s analysis suggests.
But Zandi’s contribution is another useful analysis to have at our disposal as we try to bring inflation back under control.
Below is Mark Zandi’s analysis of the primary culprits behind current inflation in the U.S.:
Zandi argued that the Russian invasion of Ukraine and COVID-19 pandemic were the primary drivers, followed by the shortage of affordable housing (as you can see in the table above).
According to Zandi, the “other” category in his analysis is underlying inflation consistent with the Federal Reserve’s inflation target—which suggests that, if not for the factors accounted for in his analysis, inflation would currently be near that target.
Zandi stated that frequently-discussed reasons for our current outsized inflation—such as government regulation, strong money supply growth, and corporate greed—are not actually playing a significant role. Other economists are skeptical of this claim.
Zandi’s analysis suggests that:
“[I]nflation will peak when the fallout of the Russian aggression on oil/commodities is behind us. . . Inflation should thus moderate meaningfully by this time next year. But the housing shortage won’t be resolved soon, thus inflation won’t be fully back in the box until mid-decade.”
A GLOBAL PHENOMENON
Inflation is of course a problem not only in the U.S. but across the globe. An analysis by Deutsche Bank of inflation rates across 111 countries, for instance, found a 7.9% median rate, which has more than doubled from 3.0% a year ago, making it “truly a global phenomenon.”
The U.S. is near the middle of the pack at 48th highest (out of 111) in the analysis. For more on where the U.S. ranks, check out this analysis from Barron’s, this analysis from Axios, and this analysis from the Pew Research Center.
Rates vary significantly from country to country, with lower rates in places like Japan (around 2.5%), to average rates in countries like Germany (around 7.9%) and the Netherlands (around 8.8%), to higher rates around 20% in the Baltic states, to nearly 74% in Turkey.