PLASTICS: How inflation could affect economic recovery

This content is provided by the Plastics Industry Association (PLASTICS) and appears in the August 2021 issue of Plastics Machinery & Manufacturing.

There is a barking dog in the economy and its name is inflation. Headline inflation in June, measured by the Consumer Price Index, came in at 5.4 percent from a year earlier. Core inflation, which excludes volatile food and energy prices, was 4.5 percent in June. While energy commodities and used car prices magnified the increase in prices last month, the business and household sectors of the economy have had to deal with rising prices since March. Following 2.6 percent inflation in March, April and May saw inflation at 4.2 percent and 4.9 percent, respectively.  

— PLASTICS Chief Economist Perc Pineda, Ph.D. 

The Barking Dog 

The U.S. economy recovered more quickly than expected from the slowdown last year. Strong demand for goods caused inventories to decrease. This occurred because the service sector was still under pandemic restrictions. Businesses generally welcome falling inventories due to brisk sales if they can restock. Unfortunately, the aggregate supply side of the economy has not recovered as fast as aggregate demand. The COVID-19 restrictions have caused shortages of materials and labor, leading to lower production.  

Policy explanation to inflation 

Lower production is one side of the inflation story. The other side is liquidity. U.S. expansionary monetary policy was in high gear with the injection of liquidity into the financial markets and near-zero interest rates as the economy went into lockdowns last year. It was the appropriate monetary policy response at that time. Government stimulus was also the appropriate response to protect the balance sheets of businesses and households.  

Interest rates remain low, and liquidity still runs high today. Hence, demand continues to increase against the backdrop of slow-rising production. The economy needs a boost of productivity through human capital. The U.S. employment-population ratio needs to increase, which may happen after the extended unemployment benefits expire in September.   

What’s ahead? 

Rising inflation is not unique to the U.S. Moreover, external factors are contributing to rising prices such as the recent surge in container freight rates. The U.S. is the world’s top importing country. In the first quarter, merchandise imports were 16.3 percent of gross domestic product — or 23.2 percent of personal consumption expenditures. Supply chain difficulties in other countries — particularly in U.S. major trading partners — affect the U.S. economy.  

What does this all mean? Stay tuned. The world is still recovering from the pandemic. Prices will continue to adjust in response to market realities. However, rising inflation could cause global economic growth to slow. 

PLASTICS provides members with industry insights like this, as well as exclusive macroeconomic analysis and forecasts year-round. Additionally, industry and trade data are always available at members’ fingertips. Learn more at www.plasticsindustry.org.