My City June 2021

MYECON

The amount of spending the federal government has undertaken in response to COVID-19 is unprecedented. The most recent COVID relief package that was signed into law in March gave each person a $2,000 check so long as they fell under an income threshold, regardless of whether that person suffered a loss of income or em ployment.The COVID relief package also expanded the child tax credit to $3,600 for children six and under and to $3,000 for children over six.Thus, a family of four with two young children would have received $12,800 from the federal government through this relief package on top of the assistance received from the two previous packages. Some of this money was saved, as the personal savings rate increased from about 8% pre-COVID to nearly 30% today.Much of this money was also spent. It is not surpris ing that prices are rising for goods that have been purchased with this money, as stimulus money was used for things such s a down payment on a new home and home improvement rojects. It also explains why grocery prices have risen by less, s people are unlikely to use the stimulus check to purchase dditional groceries once weekly food needs are met. These stimulus packages have been financed largely y printing money.The Federal Reserve has increased he money supply by $2.5 trillion during the pandemic, 43% increase.This means that nearly half of all dollars n circulation were created last year.This is the classic ecipe for inflation, namely printing money and spending that newly printed money. If this is what is driving price increases, then it will not end when supply chain disrup tions do. It will only end when the federal government spends less, the COVID relief payments end and the Fed er l R p p dl h ppl x

F ederal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen have said that if there is inflation, it will be “transi tory,” meaning a short-term phenomenon. The argument is that COVID-19 has disrupted global supply chains, resulting in price increases for various goods. Once these disruptions are fixed, inflation should subside. It is like when gasoline prices spike during a hurricane, then fall once the supply comes back online. Prices have risen during the pandemic. Lum ber prices have more than doubled with the price of construction materials in general increasing by 17%. Home prices have risen by 12% nationwide with more rapid price increases in some markets. Bidding wars are routine for new homes on the market with the final sal prices above asking. Food prices have increased by less, but are still 4% higher than when the pandemic began. It would be comforting if these price increases were transitory, and prices moderate when life gets back to nor mal (hopefully by this summer). However, there is reason to believe that this inflation might be longer lasting than what would occur from mere supply chain hiccups. Are We Seeing INFLATION? BY DR. CHRISTOPHER DOUGLAS

Romolo Tavani / stock.adobe.com George Dolgikh / stock.adobe.com

Dr. Christopher Douglas came to the Univer sity of Michigan-Flint in 2006. He earned a B.S. in Electrical Engineering and a B.S. in Economics from Michigan Technological University in 2001, and his Ph.D. in Economics from Michigan State University in 2007. As

Associate Professor and Chair of the Department of Economics, he teaches Principles of Microeconomics, Principles of Macroeconomics, International Economics, Public Finance, and Sports Economics.

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