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The Ford School for Public Policy hosted a panel Monday evening to discuss inflation rates and changing labor force dynamics in the U.S. economy during the COVID-19 pandemic. Luke Shaefer, the school’s associate dean for Research and Policy Engagement, moderated the panel of Public Policy School professors.

Shaefer said that while the social safety net expanded during the pandemic, the reduced poverty rates, increased job openings and inflation rates will continue to impact economic recovery going forward. Despite efforts to boost the economy, Shaefer said many people in the U.S. are still dealing with the increased costs due to the COVID-19 pandemic.

“Americans are feeling the effects of rising prices every day at the grocery store, at the gas pump and in their online retailer checkout carts,” Shaefer said.

Josh Hausman, associate professor of Public Policy and Economics, said the change in the U.S. inflation rate over the past year is the most rapid inflation rate growth since 1982. From December 2020 to December 2021, the United States consumer price index — or the change in the cost of living over time — rose by 7%. Hausman also said apart from the rising prices, inflation brings risk of inefficient wages and uneven price changes across markets.

“At least in the short-run, wages may not rise as fast as prices,” Hausman said. “At the same time as prices rose 7% (this past year), average hourly earnings rose only 4.7%.”

Hausman said that although the Federal Reserve predicts that inflation rates will be back below 3% by the end of 2022, inflation rates will not decrease unless workers who left the workforce during the pandemic return to work. Hausman said that the effects COVID-19 had on the labor force will not fade away.

“Even if the COVID situation in the U.S. improves, there are other possible supply shocks on the horizon,” Hausman said. “For instance, China’s effort to maintain zero COVID (cases) in the face of omicron could well lead to disruptions of production in China, increasing prices for Chinese-made goods in the U.S.”

Kathryn Dominguez, professor of Public Policy and Economics, said inflation rates grew during the pandemic because of decreases in demand for service goods and rises in demand for durable goods, or products that last for a long time. Dominguez said inflation rates grew in the market for durable goods because of disproportionate demand and supply levels for these long-lasting products.

“On the supply side, global disruptions in production, supply chains and lower labor force participation have combined to reduce the supply of the very goods that people are demanding more of,” Dominguez said. “Economists have a supply and demand model that says higher demand, lower supply, and that’s going to lead to higher prices.”

Betsey Stevenson, professor of Public Policy and Economics, emphasized that inflation often leads to reallocation of wealth across the labor market. She said young people at the lower end of the wage spectrum, and those looking for new work, will see wage gains as inflation increases.

“Consumers are changing what they want to buy (and) people are changing where they want to work,” Stevenson said. “Everybody’s sort of shuffling around. What we’re seeing is that some people are able to shuffle to get higher wages for themselves, and other people who are staying put are seeing that their wages aren’t keeping up with inflation.”

Stevenson said that one-fifth of workers in the United States economy work in the goods producing sector, while four-fifths of the workers work in service industries. She added that while recessions usually affect the goods sector, the pandemic caused a recession to hit the service sector.

“The service sector has also been the slowest to recover from that recession,” Stevenson said. “That’s also a place where we’re not seeing a lot of inflation right now. Looking at the things where we used to be worried about inflation, like health care inflation, we’re not seeing that be a particularly big problem.”

Stevenson said if demand for services increases, inflation will increase in the service sector as well if labor forces do not return to work. She added that although 2021 opened many jobs back up, many workers at high risk for COVID-19 did not return to the workforce.

“We continue to have people who are not coming into the labor force because they’re fearful of COVID,” Stevenson said. “So labor force participation for people over the age of 55 is a lot lower.”

John Leahy, professor of Macroeconomics and Public Policy, said that federal policy and fiscal relief during the pandemic contributed to disproportionate demand and supply.

“One of the striking things about the last three years is that personal income hasn’t fallen, even though the unemployment rate shot up, and even though production fell,” Leahy said. “The policies of the Trump administration and the Biden administration kept money in people’s hands, and that was a huge victory. But what it meant was that there was a lot of demand for very few goods.”

Leahy said up until 2020, the Federal Reserve raised interest rates when they believed inflation rates may rise above 2%. During the pandemic, the Federal Reserve did not raise interest rates in order to regulate unemployment levels, but is expected to raise the rates this year. 

“Interest rate rises take genuinely about a year to a year and a half before they fully influence the economy,” Leahy said. “So if they’re not raising rates until the middle of next year in March, say, we’re gonna see the contractionary effects sometime in 2023.”

Daily Staff Reporter Vanessa Kiefer can be reached at vkiefer@umich.edu.