General Discussion

No - inflation was not just caused by supply constraints. There were multiple factors that went into inflation rising the way it did.

1. The economy was nearly shut down for an entire year. Americans didn't spend. The government handed out multiple stimulus checks. There were rent freezes and student loan freezes that meant millions of Americans were able to put away a ton of money throughout 2020. On top of that, you had the child tax credit that lifted a great deal of children out of poverty - again because we were giving Americans a lot of money.

2. When the economy opened up in 2021, people started spending - at a rate that we almost never see with the economy:



When consumers spend, demand goes up and when demand goes up, so do prices. Yes, the supply constraints didn't help but even if there wasn't supply issues, inflation would have continued to go up because Americans would have continued to spend and spend all that money they packed away in 2020.

3. One way to lower inflation significantly, and quickly, is to jolt the economy by forcing a recession. We saw this in the 1980s. The Fed, led by Paul Volcker, raised rates - and raised 'em way higher than what we've seen the last couple years:



Had Powell done as dramatic of an increase when it became apparent inflation was surging, the economy would have slowed significantly in 2021-2023 That would have limited spending, which would have loosened the demand and costs would not have risen as fast.

Instead, he went with the soft landing approach. He raised interest rates but still likely balanced the rate hikes so that they didn't shock employment to the levels we saw in the very early 1980s. That allowed for the economy to continue to grow but it also prolonged the length of the high-levels of inflation:



It wasn't until summer of 2023 that inflation dipped below 4% and July of THIS YEAR that it dipped below 3%.

That was the soft landing at play. Inflation dropped - even significantly - but still remained above what the healthy expectation is (around 2%) from April, 2021 (4.2%) to about August of this year when it came in 2.5%). Interestingly enough, inflation saw an uptick this past month and is back to 2.6%, so on the higher-end of what is considered 'good'.

We navigated the soft landing perfectly but the slowness of the landing created a very difficult perception for Biden and his administration to overcome. That's just reality.