Strong demand for durable goods keeps US inflation running wild

The strong demand for durable goods in the United States, a consequence of increased household savings due to fiscal stimulus policies and reduced spending on services, is the main cause behind the country's high inflation, the highest in almost 40 years.

Although the rise in prices is due to multiple factors, many of them intertwined, economists consulted by the EFE news agency agreed that the main trigger is consumer demand for goods, which in turn has repercussions for the supply crisis and shortages of supply and labour. 

"The United States adopted the most drastic fiscal response in the world and is experiencing inflation to match," said Duke University economics professor Connel Fullenkamp in an interview with EFE news agency.

According to the economist, the generous aid granted by the administrations of former President Donald Trump (2017-2021) and current President Joe Biden to families, businesses and the unemployed has served to alleviate the hardships of many people and has also allowed many to accumulate savings that they are now spending.

"Many households received more than they needed and are still spending it, which keeps demand soaring and, in turn, exacerbates problems in the supply chain. During the pandemic, Americans' savings went up by $2.5 trillion," the professor explained. 

In addition, the strong stimulus policy had another consequence that is also contributing to inflation: many people have opted out of the labour market as their needs have been met by the increase in unemployment benefits - a policy that ended in September - and the growth in savings.

This explains the labour shortage in the US, a situation in which employers are finding it very difficult to find and retain workers, so they are offering them higher wages which in turn are passing on higher prices to consumers.

"A lot of people are taking time off or are looking for a specific job, not taking the first thing that comes along because there is no pressing need. They are looking for good jobs and in a location they like," Fullenkamp added.

To combat inflation, the Federal Reserve (Fed, the US central bank) has already begun to phase out its monthly bond programme, and this week announced it plans to end it completely by March next year.

After a two-day meeting of US central bank governors, the Fed left interest rates unchanged for the time being in the range of 0 to 0.25 per cent, but several of the governors participating in that meeting indicated in their individual forecasts that they expect up to three interest rate hikes in 2022. 

In a similar vein to Fullenkamp, also the director of the Quantitative Economics Research Seminar at the University of Michigan, Gabriel Ehrlich, points to an above-normal demand for goods as the main reason for inflation, and compares this to the significantly lower increase in the prices of services.

"The inflation we've seen so far has been focused on goods. People have not been able to spend on services as they did in 2019: they have not been able to go to the cinema, travel, eat in restaurants.... And all that money has shifted towards durable goods," he said in an interview with EFE news agency. 

The Consumer Price Index (CPI) reflects this in November - its most recent data - when it recorded a total year-on-year price increase of 6.8%, but with a large variation between durable goods (9.4%) and services (3.4%).

Of the durable goods, vehicles are one of the products whose prices have risen the most, standing at 11.1 % year-on-year for newly manufactured vehicles and 31.4 % for second-hand vehicles.

Like Fullenkamp, Ehrlich believes that generous fiscal and monetary policies help to explain this increase in demand, but he believes that it should not be forgotten that they have been carried out to "avoid a deep and lasting recession".

In this sense, he recalled that, although inflation is the price to pay, the US is also growing at a faster rate than many other countries.