Graphic by Paola Diaz Del Castillo Rosique ’23 /The Choate News
For the past decade, the inflation rate of the United States Dollar has stayed around 2%, a quantity that the Federal Reserve deems as healthy. However, the global pandemic has caused the inflation rate to reach its highest point in 40 years at a rate of 7.9%. Though the United States federal government continues to combat inflation by increasing interest rates, the unique circumstances presented by supply chain disruptions continue to stagnate the recovering economy. Supply chain disruptions, caused by a shortage of materials due to a severe imbalance between supply and demand, must be addressed by the United States to allow for conventional methods of stemming inflation to properly function in an unconventional setting.
In order to remedy the disruptions made to supply chains, the production, and transportation of products must be modified. According to the Council on Foreign Relations, to cut down on costs for warehouses and prevent excess inventory, companies tend to order parts for their products only when necessary. This method of collecting components makes companies vulnerable as disruptions in the manufacturing process for products have increased due to the pandemic. As a result, it would be beneficial to companies to increase their resilience by increasing domestic stockpiles and diversifying their production sources to counteract severe disruptions that may be made with failed production. Many goods are overwhelmingly sourced from China because of lower costs, but companies were cut off from goods when Covid-19 brought Chinese factories to a close a year or two ago. Onshoring or near-shoring production in countries like Mexico will help to reduce disruptions that can occur from over-dependence on one country. The United States government should attempt to encourage such practices in companies with financial incentives.
Additionally, transportation of products has caused a serious threat to the economy, as there are not enough truck drivers to distribute items to consumers. According to the Washington Post, a multitude of licensed truck drivers prefer to work elsewhere due to long hours, poor working conditions, and low wages. The United States must pass regulations to improve the quality of life for truck drivers, such as adding overnight parking spots to reduce fatigue by repurposing personal car spaces or expanding pre-existing parking lots to encourage more individuals to become truck drivers and allow for the proper distribution of products.
Once the federal government has tackled the supply chain issue, it can then assess whether additional action on the money supply and labor supply is required. Any reduction in the money supply needs to be done carefully to avoid choking demand and plunging the economy into recession. Labor supply issues already seem to be alleviating as people are more willing to return to work as the pandemic wains. In addition, as unemployment benefits decrease, people will be encouraged to go back into the labor market.
The rising inflation requires immediate action as it becomes progressively more challenging to afford necessary products. If the U.S. government focuses on these supply-side issues, it will play a significant role in mitigating the damages caused by the falling value of the dollar.
