Repeal the law of supply and demand!

Soaring energy prices are inflating household bills as the Consumer Price Index rose 4.2 percent in October, up from 3.1 percent in September. It was the steepest increase since November 2011. The increases were more than twice the central bank’s target of 2 percent, increasing the likelihood that policymakers will go ahead with the interest rate increases they have signaled are coming. The biggest contributor to higher inflation was a surge in energy costs, including wholesale natural gas. Other large contributors were higher prices for gasoline and at hotels and restaurants. The central bank has said it expects inflation to peak at about 5 percent in the spring. “This period of higher inflation is likely to be temporary.”

Is Joe Biden to blame? No, because the paragraph above describes the situation in Britain. Inflation has been surging on both sides of the Atlantic.

Is a president to blame or credit for the state of the economy? Except during extreme events such as the Great Depression or the Great Recession, a president simply isn’t powerful enough to alter the course of the American economy. For example, prices of food and energy, which are set by world markets, have risen sharply. What’s really at play is the law of supply and demand.

In the short run, the economy is a result of the availability of goods and services – in macroeconomics, the supply – and how much money consumers are willing to spend for goods and services – the demand. In its simplest terms, the levels of supply and demand for a good or service determine the price of the product. When supply and demand are in reasonable balance, prices are stable. A president doesn’t control many of the variables that determine supply and demand.

When consumers demand more of a product, or if the product is in short supply, the price of the product increases. Our economy is experiencing both of these situations at the same time. During the worst of the pandemic, consumers had fewer opportunities to spend their money: stores, restaurants, businesses were closed, and many products were unavailable. Now, consumers have more money to spend, but in the pandemic era, people have been using fewer services and buying a lot of durable goods: home appliances, exercise equipment, etc. In September, household spending on goods was 14 percent higher than it was as the pandemic was beginning in February 2020. Retail sales set a record in October, before adjusting for inflation, as shoppers splurged on electronics and home-improvement projects in particular. Major retailers like Walmart are posting strong profits, and Wall Street forecasters are predicting a holiday season that looks less like pandemic-constrained 2020 than like 2019, when a strong labor market resulted in robust sales.

Meanwhile, the supply of many goods and services is limited. Companies cut back on production during the pandemic, expecting a deep downturn in the economy. Now they do not have enough workers to ramp back up quickly. And, of course, there are the now infamous supply chain interruptions that hinder full production. Components are hard to come by especially if they’re imported from other countries that are dealing with the same problems we are. China, where many consumer goods destined for America are produced, is suffering through an ongoing energy crisis that’s curtailing their manufacturing. A shortage of computer chips forced vehicle manufacturers to cut back the number of cars and trucks they were making. Laptops, iPhones, and PlayStations – even washing machines – became harder to find in stores, and broadband providers faced month-long delays for internet routers. Popular toys disappeared from store shelves. Even packaging materials became scarce.

Prices are rising due to the increased costs of production such as shipping. Container ships are waiting offshore, sometimes for months, because ports don’t have the capacity — longshoremen, warehouse workers, customs inspectors — to unload ships any faster. Truck drivers to distribute the goods were in high demand even before the pandemic, and now there are not enough of them to do all the work available. Before the pandemic, shipping a container of merchandise from China to the U.S. would have cost Target $2,000 to $5,000. Recently, the cost is more like $24,000, at least for anything shipped on a predictable timeline; it may be $20,000 with the possibility of arriving in a few months, or whenever space on a ship eventually opens up that’s not already accounted for by companies willing to pay more.

American consumers are pessimistic about the economy, worried about inflation, and concerned about the direction of the country in general. But that’s not keeping them from spending. “It’s the demand in the first place that’s causing prices to move higher,” said Aneta Markowska, chief financial economist for Jefferies, an investment bank. “There is a supply shortage…because we’ve had this big shock to aggregate demand and supply can’t respond quickly enough.”

None of this is Joe Biden’s fault. Too bad we cannot repeal the law of supply and demand. Maybe that’s why economics is called the dismal science.

Mark Berg is a community activist, a proud Liberal, and a former socialist. His email address is MABerg175@comcast.net.