What Are The Causes of Inflation Over the Last Few Years and Who is Responsible?

With the Presidential election just a few days away, inflation continues to be front and center on the mind of many voters.  The persistently high cost of living has impacted everything from groceries, gas, housing, and healthcare.  Understandably, many people are wondering: What caused this inflation? And to what extent should the Biden administration be held responsible?

While there are many factors that impact why prices goes up, in this article I will break down five main factors that have contributed to the rise in inflation, and look at whether the Biden administration deserves the blame or if other drivers were more responsible.

1.  The COVID-19 Pandemic and Supply Chain Issues

Remember the COVID-19 pandemic?  It is easy to forget the significant impact the pandemic had on our lives.  When the pandemic began, governments all over the world shut down businesses, restricted travel, and asked people to quarantine at home. As a result of these actions, economic activity ground down to a halt.  Factories closed, ports backed up, and shipments of goods were delayed. These problems created a disruption in the global supply chain, meaning that goods and materials were not being produced, shipped, or delivered like they usually were.

However, once people started feeling safe enough to venture out and spend money again, demand rose quickly.  Suddenly, more people were looking to buy cars, appliances, and even simple household items that had become harder to obtain.  With fewer products available and more people wanting to buy them, prices naturally went up.

In addition, because of factory shutdowns, business did not have enough goods on hand to sell.  As a result, they had to raise prices to make up for the lack of inventory and cover their own higher business expenses.

There is a case to be made that some companies took advantage of this situation to increase their prices beyond what was necessary, which is called “price gouging”.  Energy, food, and consumer goods companies saw substantial profit growth during this time.  Unique market conditions like limited competition or strong demand, allowed them to increase prices more aggressively without losing customers.

So, while these supply chain issues contributed to rising prices, they were not the Biden administration’s doing.  Countries around the world were impacted by the same bottlenecks, leading to global inflation.

2.  Labor Shortages and Wage Increases

Another major factor in the rice of prices were labor shortages.  Many people either left their jobs during the pandemic or took advantage of unemployment benefits. This trend was called “The Great Resignation."  Businesses struggled to attract and retain workers, so they started offering higher wages to make jobs more appealing.  The higher cost of labor was passed onto consumers in the form of higher prices. 

During this time, the Biden administration did advocate for higher wages in support of workers’ rights.  This is beneficial for workers but can have an inflationary effect. However, labor shortages and wage increases were happening worldwide, so this was not solely the result of any particular U.S. policy.

3. Government Stimulus Programs and Increased Supply of Money

To help people pay their monthly bills during the pandemic, the government sent out several rounds of stimulus checks, increased unemployment benefits, and offered loans to businesses to help them stay open. These efforts began during the previous administration and continued under the Biden administration. The goal was to support people pay their bills, rent, and other financial responsibilities as they weathered the Covid-19 crisis.  But while these payments were helpful, it resulted in pumping a lot of money into the economy.

It is a simple fact that when more people have more money to spend, demand for goods goes up.  However, because of Covid-19, supply chains were still disrupted.  As a result, there were not enough goods available to meet this increased demand. 

Critics have argued that the extra stimulus spending under the Biden administration added to inflation. While it is likely true that the additional stimulus played some role in boosting demand, it is also true that people needed that financial help during a very challenging time. Countries that also provided stimulus packages faced similar inflation issues.  Governments around the world were stuck between a rock and hard place: provide stimulus to people and risk inflation or do nothing and risk a brutal economic recession.

4. Energy Prices and the Russian Invasion of Ukraine

The energy sector is a big driver in inflation, as higher oil and gas prices can make everything more expensive, from transporting goods to heating homes. In 2022, the Russian evasion of Ukraine had a major impact on global oil prices. Russia is a major oil and gas exporter, and the disruption to its supply affected global oil prices significantly.

Higher fuel prices meant higher costs for all kinds of goods and services. If food or goods are more expensive to transport, businesses must raise prices to cover those costs. While the Biden administration released oil from the U.S. Strategic Petroleum Reserve to help stabilize gas prices temporarily, they cannot control global oil prices, which depend heavily on supply and demand in international markets.

Critics have pointed to some of the Biden administration’s energy policies, like limiting drilling on federal land and promoting clean energy, as contributing to higher energy costs. While these policies have an impact, the biggest factor affecting oil prices in the past few years was the Russian invasion of Ukraine and the global oil supply disruptions that followed.

5. Housing Market and Interest Rates

During the Covid-19 pandemic, interest rates were kept very low to encourage spending and borrowing.  Many people took advantage of these low rates to buy homes, which drove up home prices.  But the resulting demand for housing created price surges that impacted both homebuyers and renters.  As housing prices rose, so did rents, which made managing bills even harder on people.

In response to the steep inflation increases, the Federal Reserve raised interest rates steadily over the last couple of years. Higher rates made it more expensive to borrow money, which slowed down inflation but also made housing and loans more costly. 

In this area, The Biden administration bears little responsibility as it does not control interest rates—the Federal Reserve does.

In Summary – Where Does Responsibility Lie?

Inflation over the past four years has been driven by a complicated combination of factors. The Biden administration’s policies have contributed somewhat, but it would be an oversimplification to place all the blame solely on one source.  A global pandemic, international events, labor market shifts, and supply chain issues have also played major roles in pushing prices higher.  

While some of Biden’s policies, such as support for worker rights and stimulus spending, have added to inflation, these decisions were made in response to the unique challenges of the Covid-19 pandemic.   Understanding these interconnected factors helps us see that while government policies can have an influence, a majority of inflationary factors are beyond a single administration’s control. 

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