For the first time since Jimmy Carter’s presidency, inflation is back in a big way: 5.4% from July 2020 to July 2021. From February 2020 to June 2021, food prices went up 5.4%; energy prices increased 8.9%. You’ve probably noticed it at the pump and the grocery store.
Inflation bites household budgets unevenly, landing harder on older people with savings and fixed incomes. It feeds a vicious cycle, as workers demand more pay and their employers raise prices to cover the costs. It makes it harder to plan ahead, and uncertainty is always bad for investment. Hyperinflation, when inflation just takes off and runs away, has long destabilized societies and toppled governments.
Two things cause inflation. One is having more money in circulation chasing the same amount of goods. If you gave everybody in Monopoly an extra $1,000, they’d bid more for Boardwalk.
The other is more demand: the readier people are to spend what they have, the more businesses can afford to raise prices. (Businesses also need to raise prices when wages are rising, but they can only sustain that without losing sales if the demand is there.)
Demand has been running hot for months, as people resume travel, dining out, and other pent-up activities that were shut down for COVID. More people are back to work, too, with more money to spend. These are good things, but they raise the risk of inflation.
There are two things the government shouldn’t do in that situation. One is spend a ton more money, expanding the amount in circulation. The other is to drive up wages and demand.
Joe Biden and the Democrats are doing both. Businesses have to offer higher wages to compete with extended unemployment benefits. Senate Democrats passed a $3.5 trillion budget resolution Wednesday morning, a package stuffed with more benefits. This is on top of $1.9 trillion the Democrats spent in January. There’s also a bipartisan bill with $550 billion in new infrastructure spending.
This is the wildest peacetime spending spree in U.S. history. The $6 trillion price tag is over $46,000 for every household in the country. By comparison, the federal government spent $4.1 trillion, in current dollars, fighting World War II.
Big spending by Democrats in the 1960s on Great Society benefits and the Vietnam War helped usher in the high inflation of the 1970s. Nobody can predict whether we will see a repeat this time around. But Democrats are playing with fire with our money.
Dan McLaughlin is a senior writer at National Review.