Blog Posts > Inflation Concerns are No Reason to Scale Back the Build Back Better Agenda
November 18, 2021

Inflation Concerns are No Reason to Scale Back the Build Back Better Agenda

Last week, the Bureau of Labor Statistics reported that the overall year-over-year inflation rate in October was 6.2 percent, a notably high rate. While there are many reasons to believe that inflation will ease in the coming months, some, including West Virginia Senator Joe Manchin, are arguing that current high rates of inflation are not transitory and instead are the result of too much economic stimulus, fueling arguments to further cut the provisions of the Build Back Better agenda. However, while stubbornly high, current inflation is still largely related to COVID-19’s disruptions to the economy, and scaling back the provisions of the Build Back Better agenda would not only fail to help address this inflation, but could potentially make it even more painful for West Virginians.

The American Rescue Plan Act provided a significant boost to the economy in 2021, as stimulus checks, enhanced unemployment benefits, and aid to state and local governments kept the economy going as COVID-19 continued to depress economic activity. While the amount of aid was substantial, the data shows that it has not led to an overheating of the economy. Instead, as of the third quarter of 2021, actual gross domestic product (GDP) is still below what the Congressional Budget Office estimated potential GDP would be. That means, given the economy’s capacity prior to the pandemic, the economy should be capable of producing as much GDP as was produced in the third quarter of 2021 without causing any inflation. Meanwhile the national economy is still down 4.2 million jobs, and West Virginia is still down 27,400.

So why is there high inflation now? Rather than too much stimulus causing too much demand, recent inflation has been a result of a sharp reallocation in spending in response to the pandemic. During the recovery, households cut back spending on face-to-face services (e.g., at restaurants, hotels, and gyms) and significantly increased spending on goods (such as clothing, furniture, and automobiles). As of September 2021, while total consumer expenditures on services were up only 2.8 percent compared to pre-pandemic levels, total consumer expenditures on goods were up 21.7 percent, and are well above historic levels. This is evident in October’s inflation data. The annual inflation rate for commodities is 8.4 percent, while the rate for services is just 3.2 percent.

This rapid increase in demand for goods instead of services has exacerbated supply-chain disruptions that were initiated by COVID-19. Global production shut down during the pandemic, and as production came back, volumes were much higher than before to meet the backlog, creating supply chain issues throughout the economy. And this has in turn led to further production issues. For example, while spending on automobiles is up, automobile production itself is actually down, as supply chain issues have hampered the production processes. And the inflation rate for automobiles (26.4 percent for used cars) has been a major driver of overall inflation.

A similar story can be told for energy prices. While demand for oil and gas is up as consumers begin to travel and commute again, production has yet to rebound after its collapse during the pandemic. Monthly crude oil production is still down over 7 percent from its pre-pandemic levels. With production still climbing out of the pandemic hole, even as demand has returned, prices have spiked, and the inflation rate for energy is at 30.0 percent.

These causes of inflation are largely related to COVID’s disruptions to the economy and experts believe they will be temporary. And while there has been inflation, the economy has also added 5.8 million jobs over the past year, as well as increased wage and income growth, in large part thanks to the American Rescue Plan Act. If the response to the pandemic was scaled back due to inflation concerns, much of those gains would have been lost. And even with inflation, households in West Virginia are largely better off than they were a year ago. The unemployment rate, while still high when accounting for missing workers, has fallen, and far fewer households are reporting difficulty meeting their household expenses, paying rent, and getting enough to eat.

However, those numbers, while reduced thanks to the provisions of the American Rescue Plan Act, are still too high, and too many West Virginians are struggling to find and afford child care, working for wages that are too low, and struggling to balance their health, family, and work responsibilities, all areas the Build Back Better agenda addresses.

With all of that being said, the current inflation spike provides no reason to cut back on the Build Back Better agenda. Instead, the case for enacting the Build Back Better agenda is even stronger. First, while the American Rescue Plan Act was largely front-loaded with fiscal stimulus to provide an immediate response to the pandemic recession, the Build Back Better agenda is a long-term investment in the U.S. economy. It is also largely paid for and financed by tax increases on the wealthy, which would blunt any inflationary impact. In fact, the investments in the Build Back Better agenda are actually expected to boost the productive capacity of the U.S. economy and ease inflationary pressure in the future. Further, the investments in clean energy and curtailing fossil fuel use will reduce the economy’s and households’ vulnerability to energy price spikes, like we are experiencing now.

While inflation is a concern for the economy right now, we also face chronic societal problems including underinvestment in children, insufficient support for working parents, and inadequate policies to mitigate the impacts of climate change, all of which are addressed by the Build Back Better agenda. Overreacting to the supply chain and COVID-related sources of today’s inflation by scaling back critical and necessary investments in longstanding needs would be a mistake.

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