Duke News

July 21, 2021

Summary: Federal Reserve Chairman Jerome Powell recently spoke to Congress about inflation concerns, and tied the recent surge to the ongoing economic reopening. He expressed doubts that the hyperinflation seen in the 1970s will return. President Biden said in recent remarks that the inflation is likely temporary.

The following comments from Duke University professor William A. Darity Jr., an economist and expert on wealth and racial disparities, are available for use in your coverage.

“Any large volume of new public expenditures, including the sums of money the federal government has allocated to meet the economic demands produced by the COVID-19 crisis, carries with it the danger of high inflation,” says William A. Darity Jr., a professor of public policy, African and African American Studies and economics at Duke University. “When there are significant shortages of goods and services, prices can rise so quickly and sharply that incomes cannot keep up.”

“An injection of public spending in the economy typically leads to an increase in aggregate demand — the total demand for all goods and services available. The rise in total demand can lead to increased production (a stimulus effect) or higher prices (an inflation effect), or both.”

“The key question is whether the stimulus effect dominates the inflation effect.”

“There has also been an increase in the savings rate during the pandemic, as spending has been limited in recent months because of the constraints created by requirements for physical distancing and isolation caused by the pandemic. I have seen estimates that the national savings rate rose as high as 20 percent during the course of the pandemic, an extraordinary rate in a country where the usual savings rate is less than 5 percent.”

“The rise in the savings rate is attributable not only to the impact on spending activity created by the necessary blocks placed on personal interaction, but also to the fact that income supports provided through the CARES Act went disproportionately to more affluent Americans with a greater capacity to save.”

“The crisis also has resulted in an excess loss of at least 200,000 businesses, despite the Payroll Protection Plan, lowering the nation’s productive capacity. The combination of the release of stored demand with a lower level of capacity to generate goods and services is a recipe for inflation.”

“Under the most optimistic scenario, the current rise in consumer spending will stimulate new production of goods and services that will make the pressure to push prices upward temporary. But we simply do not know what will happen.”

William A. Darity Jr. is a professor of public policy, African and African American Studies and economics at Duke University’s Sanford School of Public Policy. He is the director of the Samuel DuBois Cook Center on Social Equity at Duke. With A. Kirsten Mullen, he is the author of “From Here to Equality: Reparations for Black Americans in the Twenty-First Century.”