I paid forty dollars to fill up my Toyota Corolla’s gas tank yesterday and it hurt. I’ve gotten used to budgeting around thirty bucks for gas, and I remember the glory days when gasoline was less than two dollars a gallon. Seeing a foot-tall red four on the left side of gas station signs generates an anxiety that I did not expect to feel. And it’s not only gasoline- the prices of thousands of goods and services are rising, from food to cars. The Bureau of Labor Statistics reports that in February of 2022 aggregate prices were 7.9 percent higher than in February of 2021, a 40 year high. Witnessing inflation is like seeing your money dissolved in front of your eyes, and there is absolutely nothing you can do about it. 

The stress associated with inflation makes it front and center in the minds of the American people. After all, the overall price level in the US economy is the most direct way that we all interact with the macroeconomy, and therefore it is the main metric we use when we evaluate the health of the overall economy. The salience of inflation to voters makes it a political issue, so partisans predictably provide oversimplified, misleading explanations for why prices are rising. This makes it difficult to understand exactly why gasoline and food are taking up increasing percentages of our budgets. Unfortunately, the reality is more complicated than the pundits make it seem.

Republicans like to blame inflation exclusively on Biden’s 1.9 trillion American Rescue Plan, while Democrats point to COVID related supply chain issues and corporate greed. Experts generally agree that rising prices are caused by a confluence of factors. David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, told Phil McCausland at NBC that, “There’s a lot of things that pushed up demand and a lot that’s kept supply from responding accordingly, as a result we have inflation.” Let’s take the major factors in turn.

There’s no doubt that the Biden Administration’s stimulus played a role in causing the inflation we are currently seeing. Brian Riedl, a senior fellow at the Manhattan Institute, described the Rescue Plan as “[shooting] a $1.9 trillion bazooka into a $420 billion output gap,” in an interview with McCausland. Biden’s historic support of the economy during COVID, which included increased unemployment benefits, stimulus payments direct to consumers and payroll support for small businesses, stimulated overall demand, while supply remained constant or decreased, which led to shortages and higher prices. 

This is not to say that the Rescue Plan was altogether a bad idea, however. Robert Triest, chair and professor of economics at Northeastern and former vice president of the Federal Reserve Bank of Boston told Ian Thomsen at Northeastern University that the inflation that we are observing is “not necessarily indicative of a government mistake, because the economy actually performed quite well. We didn’t have an economic collapse. It’s a judgment call whether there was too much support of the economy, or whether they hit it about right.” Biden was facing a fundamentally endangered economy when he came into office, one that had been severely damaged by the pandemic. The lack of a major recession during this period is a testament to Biden’s aggressive fiscal policy. 

European countries that did not use such aggressive stimulus are also experiencing inflation, as the White House is quick to point out. Press secretary Jen Psaki emphasized rising prices in the UK and Germany in a January press conference, blaming global supply chain issues.

Psaki has a point; supply chain bottlenecks have played an important role in rising prices. The supply chain is simply the way that factors of production are supplied to one company, which then supplies another company, which then supplies another company, which then sells and transports the end product to the consumer. The pandemic has severely damaged the global supply chain, as shutdowns in various factories and locations around the globe prevent firms and individuals worldwide from getting the resources they need. This causes economy-wide shortages, which drive up prices. Difficulties in supplying Taiwan-made superconductors, for example, have led to record spikes in the price of used cars, and backlogs at the ports of Long Beach and Los Angeles make getting products from Southeast Asia into the United States prohibitively difficult and expensive. 

Finally, many Democrats are blaming market consolidation and corporate greed for rising prices. Senator Elizabeth Warren, for example, wrote in a letter to  Commerce Secretary Gina Raimondo that “[M]arket concentration has reduced competition, allowing giant corporations to deliver massive returns for shareholders. But it has harmed consumers by enabling these dominant companies to increase prices and underinvest in key capabilities,” according to a CNN Business report. It is likely that outsized pricing power by large companies is contributing to the rise in prices of particular goods, but not necessarily in the economy as a whole. 

The meat-packing industry in particular exhibits signs of market consolidation leading to higher prices, as only “[f]our companies — Tyson, JBS, Marfrig and Seaboard — control up to 85% of the nation’s beef, pork and chicken markets,” according to reporting by Manuel Bojorquez at CBS. Ricardo Salvador, a scientist with the Union of Concerned Scientists, a nonprofit advocacy group, told CBS that he blames the incredible rise in the cost of meat on the pricing power of these four companies, “You’re seeing just orders of magnitude greater profit that are not justified by the actual rate of inflation or their increased costs.” This indicates that these companies are increasing prices more than they need to to cover their increased costs of operation. 

Profiteering by monopolistic companies is not a widely accepted explanation for rising prices on the whole, however. Many economists argue that most companies do not have the ability to raise prices beyond what they require to cover their costs without losing customers, and that there is no reason to believe that levels of greed have increased since before the pandemic, when inflation was at historic lows. A report by Yardeni Research provides data disproving the corporate greed theory. They found that “the average operating profit margin for companies in the S&P 500 index — how much is earned from each additional dollar of revenue — peaked in the middle of last year and is now 12.7 percent, about unchanged from 2018.” In other words, most companies are not making additional profits by ripping off consumers. P&G, for example, has been increasing prices but maintains that it has been forced to by increased costs. Lauren Lieberman, consumer products analyst for Barclays, told David Lynch at the Washington Post that “They’re pricing to protect profits, not to increase profits.” 

Similar factors are leading to the pain felt by all at the gas station. The war in Ukraine and the resulting sanctions of Russia by western countries has restricted the global supply of oil, as Russia is one of the world’s leading oil suppliers. OPEC, the cartel of major oil producing countries, is also struggling to agree to increase production. Julianne Pepitone at CNN reports that Saudi Arabia, Iran, and the United Arab Emirates have no immediate plans to ramp up production. Gas prices, therefore, will likely be high for the foreseeable future, though recent decisions by the Biden Administration and other European countries to tap into their strategic oil reserves may provide some relief. 

Inflation is the side effect of the disruptions that COVID and the attempts to mitigate it caused to the global economy. One specific factor cannot be blamed for the decreasing purchasing power of the dollar, as the price of every good is determined by its own supply chain and market. The Biden administration and the federal reserve are working to slow down rising prices, but a decrease in inflation will likely take time. We all might need to get used to paying more at the pump and the grocery store for the time being.