(Bloomberg Opinion) -- The Federal Reserve has been patient in addressing inflation so far, even though policymakers and the general public are uncomfortable with the rate of price increases. Treasury Secretary Janet Yellen, formerly Federal Reserve chair, recently said that she expects inflation to fall to acceptable levels in the second half of 2022. It's looking as if the Biden administration believes inflation management is a job best left to the private sector rather than the government.
That was far from the case in the high-inflation 1970s when an energy crisis stoked fears about U.S. dependence on foreign oil. The current cycle is tied to supply chain disruptions, which the country is much better equipped to handle.
In 1973, the U.S. was addicted to foreign crude. Imports had doubled since 1970, representing a third of all domestic consumption. The U.S. economy was much more manufacturing-based than it is today, with the sector accounting for almost a quarter of employment — the equivalent of 35 million jobs today. The loss of foreign oil supply was crippling, triggering both higher prices throughout the economy and lost production. On some level this was a supply-chain problem, too, but one with no easy fixes — policymakers couldn't just wait for ports in Los Angeles or Long Beach to unclog to get oil to start flowing again. Heavy-handed demand management, a job eventually tackled by the Federal Reserve, was the way in which policymakers eventually contained inflation.
The inflation challenges we've had over the past six months are less extreme, and they're also seen as within our ability to address without resorting to interest rate increases. There's a semiconductor shortage constraining automobile production and pushing prices higher for new and used vehicles not because of an embargo in Taiwan, but because automakers canceled orders during the worst of the pandemic and were left under-supplied when demand surged back faster than expected. The correct policy solution is to increase production of chips, which major suppliers are doing, and perhaps to rethink our approach to management of the semiconductor supply chain.
Similarly, there's a multi-pronged bottleneck when it comes to moving goods to and within the U.S.: elevated shipping costs for ocean freight, a backup at the ports tasked with receiving and unloading goods that arrive by ship, a lack of warehouse capacity as e-commerce demand continues to grow, and a shortage of truck drivers to move cargo and make last-mile deliveries to businesses and consumers. Some combination of increasing the capacity of ocean freight, improving port operations, building more warehouses and recruiting more truck drivers would help alleviate these pain points.
Labor is another driver of inflation right now, but this, too, is probably at least in part a temporary supply chain-type issue stemming from the pandemic. We still have a shortfall of five million jobs compared with February 2020, and while some of that could become permanent as people retire early or otherwise leave the labor force, we should expect at least a few million of those workers to get jobs again over time, lured by the higher wages being offered throughout the labor market.
Focusing solely on supply chains might miss some of the underlying inflationary dynamics. Even if supply chain issues are temporary, if they lead to elevated expectations for rising prices that could create its own momentum. Consumer demand is also key — after all, one of the reasons the ports are jammed is that they're moving more cargo than they ever have, and consumers continue to order a lot of stuff. But the supply chain logjams are the core of the problem right now, and that should work itself out over time.
To the extent we’re more enlightened about inflation than we were in the 1970's after decades of experience and study, we can also thank some good fortune in that the private sector is able to unclog supply bottlenecks piece by piece to stem inflation, rather than just nuking the economy with higher interest rates.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.
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