40-year-high inflation continued to rock the nation in January hitting 7.5%. The Left does not have a good explanation for the American people about what’s driving prices higher or how to slow down inflation.

U.S. House Speaker Nancy Pelosi was asked during an interview on ABC News what she thinks is driving it. She had this to say:

“The fact that people have jobs always contributes to an increase in inflation, and that’s a good thing. But inflation is not good, you know, we have to contain it.”

When pressed about the impact of President Biden’s policy and Senator Joe Manchin’s criticism that Washington spending is to blame, Pelosi rebuffed.

“And part of the consequences of all of that investment and the infrastructure bill and the rest is that more people have jobs and therefore inflation goes up.”

“Yes, we have inflation. It’s very important for us to address it, we must bring it down, but it’s not right, with all due respect in the world for my friend Joe Manchin, it’s not right to say that what we’re doing is contributing to inflation, because it’s exactly the opposite.”

Is Speaker Pelosi right to blame rising inflation on people going to work rather than massive federal spending?

“[I]t’s not right to say that what we’re doing is contributing to inflation, because it’s exactly the opposite.”
Nancy Pelosi

False. Completely make believe.

Inflation is not a good thing. It’s a sign that the economy is overheated due to demand outpacing the supply of goods and services.

Speaker Pelosi is wrong while Senator Manchin is right that trillions of dollars in federal spending are fueling inflation. The nearly $2 trillion American Rescue Plan passed in early 2021 added another round of stimulus (stimulus checks to most households, the expansion of the child tax credit paid out monthly, and the extension of generous unemployment benefits) on top of the trillions provided to households in 2020. 

This stimulus came just as the economy was reopening. Vaccines were being widely distributed. States and cities were ending lockdowns and relaxing the restrictions on businesses and Americans. Instead of helping Americans who lost income, government economic stimuli became a disincentive to work while padding the savings of many households. 

Demand for goods skyrocketed early in the pandemic as consumers had a lot of cash. Unable to spend on services like travel, dining out, haircuts, and parties, they shifted their spending to durable goods such as fitness equipment, appliances, and home repairs. 

Meanwhile, millions of workers left the workforce. They may have been laid off, had school and childcare challenges, retired, were sick or were fearful of getting sick. Even as workplaces reopened, generous government benefits incentivized many workers to stay out of the workplace in 2021. 

With record-high open positions and millions of workers out of the labor force, production on goods slowed leading to fewer goods. Prices rose as a result. Supply-chain disruptions due to fewer production of inputs and manufacturing don’t help but they are not the main driver of inflation.

As businesses could offer services again, they vied for scarce workers by raising wages and benefits and those labor costs were passed on to customers in the form of higher prices.

The bottom line is that demand is high because Americans have more cash to spend due to federal transfers from Washington or they are staying out of work in part because they can afford to thanks to those federal transfers.

Is more federal spending the solution? Democrats in Washington spent the better part of 2021 trying to advance two massive spending bills: the Infrastructure Investment and Jobs Act and the Build Back Better (BBB) agenda. This doubles down on inflationary spending.

Americans rightly view both as fueling inflation. In a recent POLITICO-Harvard study, nearly half believe that both the BBB and the infrastructure bill will increase inflation. 

In other polling, 47% of people said Biden’s policies to get inflation under control were “hurting,” compared with only 22%, who said they were “helping.” Furthermore, about the same percentage (46%) of the people believed that the BBB would push inflation higher.

Economists have sounded the alarm about massive federal spending fueling inflation, including left-leaning economists such as Obama’s former Treasury Secretary Larry Summers, last year. Economists at the Federal Reserve Bank of San Francisco also found that Biden’s American Rescue Plan was contributing to current inflation. 

Senator Machin is right to point to the inflationary impact of federal spending, instead of blaming American workers.