Inflation has been at the forefront of everyone's mind for weeks now, as it continues to be a huge problem in the country, and now the Biden administration wants more government spending by asking for additional COVID dollars in advance of what they believe is going to be another COVID surge in the fall. I spoke with Xavier University Professor of Economics Dr. Jose Bautista to discuss this not-so-great data that suggests inflation will be sticking around for a while.
Doc, the data on the consumer price index for April is better than expected, but still not pretty at all.
What's making things worse is that the producer price index is even higher. This means producers are paying 11% more than they did last year. That cost is being passed down to consumers. Don’t expect a drastic decrease in consumer prices in near future.
Can you expound on that - because there's a delayed impact of that number, right?
Businesses go through a supply chain to determine what's called the markup on their final goods so that they can generate a profit. What happens when the producer price index goes up, that profit margin goes down. And when that profit margin goes down, then firms are gonna wind up producing less. This carries over to the entire economy. Aggregate supply decreases and when you have a decrease in supply that only increases prices across the board.It will result in higher consumer prices for the near future.
President Biden said yesterday that he wants more government spending, while most economists are against the idea. Government spending has been a contributory factor to inflation. Do you think more government spending is going to cure the country’s inflation problem?
More government spending only leads to more money chasing too few goods, which increases demand. When production doesn't keep up with the demand, that's what contributes to inflation. To say that increased government spending is going to decrease inflation is a real stretch because it's assuming more government spending will increase overall supply. That only applies if our government is in the business of producing goods and services, which it is not.
Does the United States need to focus on being energy dominant in order to curb inflation?
It is the key to increasing the aggregate supply of all goods and services in the economy when you increase supply. If you're able to temper that with an increase in demand and if the increase in supply exceeds the increase in demand, then you’ll see decreases in prices.
