Who is to blame for inflation?

President Joe Biden and other politicians will tell you that inflation is the fault of Corporate America. Corporate America blames the administration's pandemic relief programs for putting too much cash into the economy. Economists say it's all of those things. And more.

No matter which of the two main inflation indicators you read - the Consumer Price Index or the Fed's preferred Personal Consumption Expenditures price index - the result is the same: inflation has risen to its highest level in almost four years. Of course, inflation is not inherently a bad thing. For the last 40 years or so in the United States, we have been living with the ideal low and slow level of inflation that comes with a well-oiled consumer-driven economy, with prices rising at around 2% per year. The current rise in prices reflects an economy returning to its heft. What worries economists and policy makers is that prices continue to rise and wages are not rising in the same way. While wages in general are also rising, so far they have not kept pace with the rising costs of food, energy, housing and everyday consumer goods. People are understandably frustrated. While there is no single culprit to blame, here are some reasons - Covid-19, greedy businesses, supply chain crisis, government - to vent your anger.

Pandemic

The pandemic turned everything about our lives upside down, and when the world shut down in the spring of 2020, it was like pulling the plug on the global economy. But that summer, demand for consumer goods began to recover. And in a big way. Congress and President Biden passed a historic $1.9 trillion stimulus bill in March that put cash directly into Americans' wallets. Instead of spending it on traveling or eating out, we spent it on things - lots and lots of things.

Corporate America

Blaming corporate America may seem morally satisfying and politically expedient. After all, profit margins are on the rise across all industries, even as production costs hit record highs. According to the Wall Street Journal, nearly two-thirds of the largest publicly traded US companies reported higher profit margins in the first nine months of 2021 compared to the same period in 2020. In other words, while raw materials, labor and transportation costs have increased due to the pandemic, many large companies are offsetting these costs by raising prices for consumers. Analysts say it is almost impossible to verify how much of the increases in consumer prices reflect rising production costs and how much reflect a desire to boost profits, but companies are not exactly hiding their price elasticity. Some even boast of their "pricing power" - corporate-speak for the ability to pass on a bigger bill to customers.

Biden Administration

Republicans blame Democrats and the Biden White House for inflation. Senate Minority Leader Mitch McConnell wasted no time in making accusations after the CPI for November came in at 6.8%. "It is unthinkable that Senate Democrats would try to respond to this inflation report by passing another massive socialist spending package in a matter of days," he tweeted. It's true that government spending drives inflation, but economists have disputed the idea that Biden's ambitious social safety net expansion will fuel price increases. "Concerns that the plan will spark unintended high inflation and an overheating economy are overblown," Mark Zandi, chief economist at Moody's Analytics, said in July. In blaming Biden for inflation, Republicans conveniently forget the trillions of dollars in spending supported by Republicans in 2020 and signed by then-President Donald Trump, which economists say contributed to inflation.

Fed

Thanks to the Fed's double-barreled shotgun approach to economic stimulus - near-zero interest rates and massive investment in bonds that keep yields near rock bottom - money has been essentially free for the past two years. This stimulus has averted a lot of financial and economic pain and was always meant to be temporary. But for months, the Fed ignored inflation concerns and vaguely characterized price increases as "temporary" before the word lost its meaning in an almost comical way. Now, the Fed is finally putting on the brakes. The central bank said last month that it would complete its stimulus program faster than it initially announced, and its updated economic projections show multiple interest rate hikes in 2022.