Eric Schuck: In seeking sources of ongoing global inflation, look to Putin rather than pandemic

Teach long enough, and eventually it feels a little like the instructions on a shampoo bottle: rinse, lather, repeat.

I say the same things over and over again. A lot.

Yet with the passage of time, something else also happens. What we know — and thus what we teach — evolves.

Personally, and I suspect this applies to a lot of people, I grew up thinking Pluto was a planet. But we all know differently now.

Bearing that in mind, it’s worth periodically circling back to re-examine our state of knowledge, to reflect on what we once thought versus what we now understand.

So it is with COVID’s effects on the economy.

Nearly three years after completely pausing the world, we do not live in the same economy we slowed back in the spring of 2020. Where we once feared a global recession of unparalleled scope, we now live in an economy stalked by inflation.

The relevant question is how the former influences the latter.

The shorthand classroom explanation of inflation is “too much money chasing not enough goods.” Consequently, inflation generally flows from an oversupply of money, an undersupply of stuff, or some intersection of the two.

Back in March 2020, the Federal Reserve backstopped the U.S. financial system with boatloads of money.

The money supply jumped from about $15 trillion in February 2020 to almost $22 trillion a year later. That’s a lot of liquidity injected into the system in a very short period of time.

The CARES Act and related anti-COVID relief programs also infused tremendous new purchasing power into the economy. Ironically, although these created inflationary pressures, they don’t explain all of it.

First off, inflation is a global phenomenon. Prices are rising in nearly every country.

Admittedly, the U.S. economy plays an oversized role globally. But even we aren’t so big as to trigger inflation from Austria to Zimbabwe.

For an answer, it’s worth looking at where inflation is most pronounced: food and energy.

Indeed, over the last year, the bulk of inflationary pressure materialized in these two sectors. They are also the most exposed to supply disruptions associated with Russia’s invasion of Ukraine.

This squarely checks the “not enough goods” box as a source of inflation.

Given this, the general consensus among economists is that while we can trace some inflationary pressures in the United States back to COVID, continued inflation on an international basis flows from global supply chain interruptions triggered by the Ukrainian War. Basically, even if domestic anti-COVID policies set the conditions for inflation to occur, it is Russian aggression which keeps the genie from being popped back into the bottle.

Understanding this creates another set of headaches. If domestic policy were the primary cause of rising prices, we have tools available to combat inflation, notably increases in interest rates, albeit at the very real risk of a recession.

However, when inflation originates primarily outside the United States, we find ourselves in what looks like a decidedly frustrating policy environment: able to tackle the effects of inflation, but not the cause. And that’s not an encouraging situation.

Fortunately, this is also where the perspective of experience comes into play.

Sometimes re-visiting a situation means recognizing old patterns in new events. For economists raised or trained in the 1970s and 1980s, global inflation rooted in war-induced oil and food shocks is an old nemesis.

We’ve fought this specter before.

It’s a slow fight, to be sure. And combating it requires a range of tools most of us haven’t contemplated for a generation or more. But we do know how.

Key among these is shifting demand and supply away from the chokepoints, i.e., reducing consumption of Russian oil while simultaneously easing movement of Ukrainian grain.

Both of those are already happening, but neither is a substitute for the ultimate solution: a world grounded in just and lasting peace.

Like I said, teach long enough and we repeat ourselves. A lot.