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 Market Mysteries of the week

  Why does the infrastructure bill make people worry about inflation?

Answer: When there’s more money being spent on the same amount of resources, prices rise. The government is making plans to spend a lot more money when prices are already rising. Thus, concern. However, it’s important to consider how the money will be spent.What causes inflation?Prices rise when there’s more money or more spending for the same amount of resources. When the economy’s demand for goods and services rises faster than its ability to produce those goods and services, inflation occurs. Prices are rising faster than normal right now because we did this crazy experiment of turning the global economy on and off really fast. There were likely to be some bumps in the road. Prices for things like cars and houses are surging because consumers are ready to buy again, but the businesses haven’t been able to ramp production back up fast enough.Policymakers say that these price spikes will be short-lived. As more people get back to work, restrictions are lifted, and production ramps up, the supply should meet demand. What is the infrastructure package doing?The infrastructure package passed by the Senate approves $550 billion of new spending to upgrade things like roads, bridges, ports, and broadband internet. It’s often called a $1 trillion spending package because senators lump in the usual spending on highways and similar projects.How could the plan affect inflation?Over the long term, the intention is to decrease inflation. By making high-speed internet more accessible, decreasing traffic on highways, or increasing the capacity of our shipping ports, infrastructure spending could increase our economic productivity. It would increase the supply of goods and services to meet the higher demand. In the near term, some economists worry it could actually decrease productivity and strain the economy, pushing up prices. Construction on a highway often causes traffic for a while before it actually reduces it. The bill also includes increased regulation for car safety and energy efficiency that some worry could slow down production or make it more costly. Shifting the nation to electric vehicles won’t happen without some friction.So should we be worried about inflation?As we’ve said before, not yet. The bottom line is no one really knows, and it will take years, maybe decades before the full effects of the plan play out. Economists can’t really model the long-term effects because past heavy spending years have coincided with many other big economic changes like wars and technological shifts. The truth is that most economists agree on the long-term benefits of improving our infrastructure. It’s hard to argue that we should never upgrade our internet access or fix our crumbling bridges. The question has been whether this is the right time when supply is already too low for demand.But, this spending has only just been approved by the Senate after months of debate. It still has to be approved by the House, then again by the Senate, then signed by the President. And then, it’s still just a plan. They then have to actually start the construction projects, hiring thousands of companies. How long have they been working on that project on the highway by your house? These things take a lot of time. The government is not known for its speed and efficiency. So the “short-term” pressures might only play out over the course of the next 2-5 years. And this $550 billion of extra spending pales in comparison to the trillions of government stimulus spending over the past year.Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team

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