Mark Levin recently debated Arthur Laffer, the well-known supply side economist, as to whether inflation would be an outcome of the shutdown of the American economy. Laffer didn’t think so; Levin predicted it would be a problem and he’s right. The reasons are simple to understand. In economics, price is a function of supply and demand. Gold is rare; people want it; the price is high.
Why will the American economy suffer from inflation? The answer is simple. Conditions resulting in a supply problem for many products and services are already evident.
* Meat producers are having to destroy both mature and young cattle and pigs because shutting down restaurants and institutional purchasers has depressed demand. The impact will result in higher meat prices when restaurants reopen, as it will take months before producers are able to gear up. Some farmers may go out of business as a result of the lack of a market for their livestock. That too will affect supply.
* Farmers are having to let produce go unharvested due to decreased demand, but more important in the future is likely to be a lack of labor––a function of several factors that will remain in place even after the virus restrictions are lifted. Prices of products from other countries will also go up as they will be battling the same problems we’ll be facing.
* Restaurants are being asked to reduce seating when they reopen. That will result in higher prices as food prices will be higher and restaurants will need to earn more per customer to cover expenses.
* Products sourced from China are very likely to cost more for a variety of reasons including the fact that Chinese factories will need to make up for lost sales during the pandemic.
* The U.S. is looking to move production of medical equipment and pharmaceuticals out of China back to their home countries to prevent a reoccurrence of supply problems that arose at the beginning stages of the crisis. Given the cost of labor is higher in the U.S., products for everything from hand sanitizers to ventilators to pharmaceuticals will be higher than in the past.
* All other products produced overseas, such as clothing, will be higher as a result of the impact on suppliers––some will have been bankrupt, while others will need to raise prices to catch up.
* Labor prices in the U.S. will be higher in many industries as people will be trying to catch up for lost income.
* Governments may have to raise taxes and fees to avoid reducing services.
Higher prices in some cases will be temporary, but high prices has an affect like a tidal wave. When the price of labor, products and services increase, the user of those products must also raise prices. I don’t know what percentage of manufacturing equipment is made in China or other low-wage countries, but if hammers, lithium-ion batteries and robots cost more, those costs will have to be passed along to consumers.
Complicating this is the fact that consumers impacted by the shutdown will have less money to spend. Having lower sales, sellers must raise prices to achieve the income they need to stay in business.
Get ready, folks. Inflation is on its way. Sorry, Mr. Laffer. Your curve won’t solve this problem.