How Is The COVID-19 Economy Impacting Inflation?


If it seems like your trips to the grocery store are more expensive now than they were before COVID-19, inflation may be to blame. The stimulus money pumped into the economy this spring has led to rising prices on many other consumer goods. What remains to be seen is how long the inflation will last and how big its impacts will be when coupled with other realities of a pandemic economy. 

Even measuring inflation is difficult right now because so much of our consumer spending habits have been upended over the past few months. Most people are spending more on groceries and less on restaurants; more on home improvement and less on travel; more on in-home entertainment and less on things like movies and concerts. 

Despite those changes, economists are starting to get a clear picture of where things stand eight months into the pandemic. 

“When you take into account these things in consumption patterns, it turns out the inflation levels are significantly higher; I would say about 1% more on an annual basis,” Harvard economist Alberto Cavallo told NPR.

Cavallo argues that the Consumer Price Index is not equipped to accurately account for these changes and created an alternative COVID-adjusted CPI that more accurately captures how people are spending money these days.

“Ultimately, our ability to buy goods and services depends not just on our wages and incomes, but also on the cost of the goods and services that we buy,” Cavallo told Time magazine. “The math is simple: if you get a wage increase of 2%, but prices also rise 2%, you have gained nothing.”

Tyler Cowen, an economist at George Mason University and founder of Marginal Revolution, offers a different way to think about inflation over the past few months, given that many parts of our lives have been upended. He argues that the quality and the value of many goods and services we receive has gone down. 

For example, many people canceled doctor and hospital visits during the pandemic’s early days because they were concerned about contracting COVD-19, leading to what Cowen describes as a higher perceived cost for medical procedures, even if the sticker price hasn’t changed. The same is true for education, he says.

“Whether for K-12 or at the university level, the cost of getting a quality education this year has risen drastically (think private tutors) — and for many individuals it may be impossible altogether,” Cowen wrote in a Bloomberg op-ed. “We are seeing deteriorating quality, and thus much higher real prices, yet this does not show up as either a quality adjustment or a price increase in standard calculations.”

Abdallah Guezour, Head of Emerging Market Debt and Commodities at Schroders. Estimates that inflation will grow by 2-3% in the coming years, which could be positive initially but lead to backlash later on. 

“Global GDP-weighted Consumer Price Inflation has been in the 2-4% range and could initially move to 4-6% in the next three years. The initial recovery in inflation will actually be positive for the global growth recovery,” Guezor said. “However, central banks and governments will not normalize monetary and fiscal policies prematurely. They will, however, need to do so eventually, as and when markets react to an inflation scare and /or fiscal crisis because of the massive build-up in fiscal deficits globally.”

With a Biden administration set to take office in January and the pandemic still ranging across the U.S., it’s unclear what, if any, government intervention might be on the way to help combat inflation as we move into 2021 and beyond.

Grassroots Pulse covers public policy and political issues aimed at engaging highly-active policy makers, donors, and grassroots leaders at the forefront of the political process in America today.

Image Credit: Photo by Brian Mcgowan on Unsplash

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