Behind America’s High Inflation – A Nightmare or a Recession
On May 2nd, the latest data released by the Institute for Supply Management (ISM) showed that the U.S. manufacturing activity index fell to 55.4 in April from 57.1 in March, the lowest level since July 2020. Reuters pointed out in the report: Expert analysis believes that the US manufacturing industry is still in a “supply chain-constrained environment.” At the same time, the consumer price index (CPI) rose by 8.5% year on year, a record high in more than 40 years. Commodities such as food and gasoline have soared. Excessive inflation has brought enormous pressure on the lives of the American people. The White House has curbed further inflation through government investment and the removal of excess tariffs on some Chinese goods. Soaring prices make Americans feel that the “American Dream” is a nightmare Driven by rising energy and food prices, the latest U.S. consumer price index (CPI) rose 8.5% in March, the highest rate in 40 years. The continued deterioration of inflation has led to soaring prices of products such as food and gasoline, severely compressing the disposable income of the American people, and ordinary households are the first to bear the brunt. According to a budget modeling analysis by the Wharton School of the University of Pennsylvania, U.S. households will spend $3,500 more in 2021 on essential goods and services tracked by the Consumer Price Index In contrast. Americans’ average hourly earnings, adjusted for inflation, fell 2.7% compared with last year. In the words of Time magazine: Americans are earning less, but their household expenses have risen. No wonder the American middle-class laments: “The American Dream is a nightmare, and I don’t want to be caught up in it again.”
Recent public opinion polls conducted by American institutions and media have shown the collective frustration of Americans facing the rising cost of living. A new poll by The Washington Post and ABC found that 94 percent of Americans are worried about inflation. A Gallup poll released in late April found that four out of five U.S. adults believe that the current state of the U.S. economy is fair (38%) or poor (42%), with few describing it as excellent (2 %) or good (18%). Additionally, 76% of respondents believe the U.S. economy is deteriorating, while only 20% believe it has improved.
The latest economic survey by CNBC and research firm Momentive shows that Americans are increasingly concerned about inflation and the risk of recession. Americans say they must reduce consumption if inflation continues. In addition, the personal approval rate and economic policy approval rate of the US president also dropped sharply. Consumer News & Business Channel (CNBC): Survey shows that it’s not just low-income groups who feel financial stress. Americans who earn more than $100,000 say they have cut spending.
U.S. commuters complain of ‘having no money to commute’ as inflation rises
According to the New York Times report on the 20th, compared with the period of the beginning of the COVID-19 epidemic in 2020, the routine expenses of American office workers commuting to work, including gasoline, coffee, food, and other expenses, have increased significantly. According to the American Automobile Association, gasoline prices in the United States averaged $4.33 a gallon in March this year, compared with an average of $2.6 a gallon in 2019. Separately, a meal at Sweetgreen, an American salad chain brand, that was priced at $11.20 last year is now $11.95. Dunkin’ Donuts’ iced latte has also gone from about $3.70 to now $3.99.
The pressure to raise wages has become increasingly heavy for businesses that are asking employees to return to the office. Industry analysts pointed out that remote work was originally a safety measure based on epidemic prevention considerations, but it has now become a cost-control approach. Analysts pointed out that commuters have previously said they “don’t want to commute to work,” but now that statement has become “can’t afford to commute to work.”
Irresponsible economic policies and practices that fuel conflict and inflation
At present, analysts generally believe that the root causes the inflation in the United States is the excess liquidity released by the Federal Reserve’s action of losing monetary policy in the early stage.
However, facing the highest U.S. inflation index in 40 years, the U.S. government attributed the high domestic inflation to the Russian-Ukrainian war. U.S. Treasury Secretary Janet Yellen said the Ukraine crisis would lead to a further deterioration in U.S. inflation that could be “uncomfortably high.” CNN reported that Yellen sees rising energy prices, rising prices for wheat and corn produced in Russia and Ukraine, and rising prices for key industrial metals such as nickel, titanium, and palladium, all of which exacerbated inflationary pressures. US President Biden even coined a new word for this – “Putin’s price hike”.
However, ordinary Americans don’t see it that way. In opinion polls, the American people’s dissatisfaction with the government’s measures to deal with inflation mainly stems from two aspects: one is the ineffective response to the epidemic; the other is that the sanctions against Russia fueled the inflation. U.S. Senate Minority Leader Mitch McConnell pointed out: “Inflation is Biden’s fault, not Putin’s.” Since the beginning of 2021, multiple inflation indicators such as the Consumer Price Index (CPI), the Personal Consumption Expenditure Price Index (PCE), and the National Industrial Producer Price Index (PPI) have all risen sharply. Since the Ukraine crisis, the United States has joined forces with Western allies to impose comprehensive sanctions on Russia. It is unclear whether the sanctions will achieve the US’s goals or not, but they did contribute to the domestic inflation. Europe’s largest insurance company – Allianz Group chief economist Elian believes that the Ukraine crisis may make the US inflation rate exceed 10%. Wharton finance professor Jeremy Siegel holds a similar view. In a recent interview, he believed that the US inflation rate will remain high for a long time. “Inflation may be a peak at 8.5%, but 6%-7% inflation will be with us for a long time,” Siegel said. “I think there are still a lot of negative factors at work that will make inflation worse. “The abuse of sanctions by the United States not only caused the prices of energy, food, and industrial metals to rise but also exacerbated inflationary pressures in the United States and increased the risk of economic recession in the U.S.
Although the Fed may be able to use its tools to reduce inflation, Jamie Martin, an economic historian at Georgetown University in the United States, recently wrote in the New York Times that as the Fed begins to raise interest rates in response to the highest inflation in decades， the risk of a recession in the process is also growing. More analysts believe that in the context of such high inflation. If the Fed tightens monetary policy, an economic recession is almost certain.
White House unveils new inflation-fighting plan
On May 6th, the White House stated US President Biden’s plan to fight inflation, saying that the current Biden administration’s top economic priority is to fight inflation by reducing consumption costs for working families and reducing the federal deficit. One of the best ways to reduce the cost of consumer goods is to strengthen U.S. manufacturing and increase supply chain activity. The government has invested more than $200 billion in building manufacturing facilities and creating jobs.
A few days ago, the Office of the U.S. Trade Representative (USTR) issued a statement announcing that the two actions in 2018 to impose tariffs on Chinese goods exported to the United States based on the results of the “Section 301 Investigation” will end on July 6 and August 23. The statutory review process for the relevant actions will be initiated. Bloomberg said the USTR is notifying U.S. domestic industry representatives who benefited from the tariffs that the tariffs may be lifted, but there is an opportunity to apply for an extension. The office will review the relevant tariffs based on the application, and these tariffs will be maintained during the review period. Bloomberg reported that the Biden administration has taken the first step in evaluating the tariffs on more than $300 billion of Chinese goods.
However, there is disagreement within the Biden administration over whether to ease tariffs on Chinese goods to reduce consumer costs and inflation or not. The Wall Street Journal quoted people familiar with the matter as saying on the May 4th that the camp led by Treasury Secretary Yellen and Commerce Secretary Raimondo is in favor of easing tariff measures on some products imported from China; while US Trade Representative Dai Qi and others are unwilling to give up tariff chips against China. Biden has been hesitant about the issue. While recently he has revisited it as he hopes to bring down the highest inflation rate in 40 years.
According to a study by the Peterson Institute for International Economics in the United States, tariffs on Chinese imports increased annual U.S. inflation by 0.26%. Another study showed that removing those tariffs could reduce U.S. inflation by 1.3%. Under severe inflationary pressures, there have been constant calls in the U.S. to lift tariffs on Chinese goods. On March 23rd, USTR reinstated tariff exemptions for 352 items imported from China to reduce inflationary pressures.
The spokesperson of China’s Ministry of Commerce previously stated that the unilateral tariff increase by the United States is not conducive to China, the United States, and the whole world. In the current situation where inflation continues to rise and the global economic recovery faces challenges, it is hoped that the U.S. will proceed from the fundamental interests of consumers and producers in China and cancel all additional tariffs on China as soon as possible, pushing bilateral economic and trade relations back to the normal track.
By Shiyue Luo
