Rethinking Inflation Policy: A Toolkit for Economic Recovery

October 12, 2021

The COVID-19 pandemic disrupted our economy in ways never before seen, but the extraordinary stimulus measures of the American Rescue Plan have set the stage for what could be a rapid recovery—with the right policy choices, and absent further upheaval from COVID variants. Alongside this welcome development, however, there has been a moderate uptick in inflation, largely due to some industries that have not been able to raise production in line with renewed demand. Although this inflation is subsiding, some have used it as an argument for curtailing public spending plans and abandoning measures to support investing in the recovery.

In “Rethinking Inflation Policy: A Toolkit for Economic Recovery”, J.W. Mason and Lauren Melodia explore the specific causes and characteristics of the price increases we face and suggest a “toolkit” of policy reforms to tackle the structural problems fueling inflation. Rather than raising interest rates or cutting back federal spending plans—both of which would set back the economic recovery and have a disproportionate impact on low-wage and Black and brown workers—they offer alternative methods to combat inflation: investing in supply chains, tackling market concentration, raising wages, and negotiating or regulating prices. Focusing on the underlying issues that cause prices to rise rather than on aggregate spending and wages could alleviate inflationary pressures while keeping the economy on a path toward strong growth and shared prosperity.