Perspective: No Matter What Happens in Ukraine, Why Inflation Will Keep Trending

High gas prices and more expensive trips to the grocery store were among the everyday challenges facing U.S. citizens well before Russia invaded Ukraine last month. The war is only intensifying an already bleak economic situation driven by federal stimulus spending, University of Virginia economics professor Edwin Burton said.

“The U.S. economy is on an inflation course for at least a couple more years,” Burton said. “And the outbreak in Eastern Europe will aggravate that situation. But even if that would have never happened, you’d still have a major inflation story going on.”

Inflation, generally defined as an increase in the average price of goods and services over time, is at a 40-year high. The Consumer Price Index, which is used to measure inflation, rose 7.9% from February 2021 to February 2022. Russia invaded Ukraine on Feb. 24.

When analyzing the big economic picture, Burton acknowledges the war’s impact, but also notes the lingering consequences stemming from the three heavy stimulus packages that were pumped into the U.S. economy by the federal government, beginning in April 2020 under the Trump administration, at the onset of the COVID-19 pandemic, and ending in March 2021 under the Biden administration.

Economics professor Edwin Burton specializes in finance. (Photo by Dan Addison, University Communications)

“The economy came into this period in early 2020 with the [gross domestic product] at a little under $20 trillion, depending on which months you review,” Burton said. “And then, all of a sudden, you spend $6 trillion on top of that, that wasn’t expected, wasn’t budgeted for, in a series of different congressional packages – and the money growth shot up almost 50%. So, you had that dynamic all hitting during the period from late 2019 to early 2022.”

Checks were sent directly to U.S. households as a way to combat the economic hardships caused by the pandemic. The pros? Americans were able to reduce anxiety about the future by now having an improved ability to buy food and pay household bills, according to a May 2021 Census Bureau survey.

The cons, though, are in motion now, Burton said.

“This inflation is caused by too much spending and the monetization of the debt,” Burton said. “The Federal Reserve was buying a lot of the debt, which put a huge increase in the money supply end of the economy. I’m among the handful of economists saying that. Regardless of what’s happening with the economy, regardless of what’s happening in the supply chain, you were booked to get substantial inflation.”

He added, “No one ever wins an economic debate. Everybody just stakes out their position and throws darts at one another. It’s often hard to piece out of the data who’s right and who’s wrong. People have very strong opinions.”

The consensus view among other economists, however, Burton said, is that the rising inflation rate is being driven by surging energy costs and supply constraints.

“The difficulty in believing that is: Once energy prices come down and supply constraints ease, I presume they would expect there would be no more inflation,” Burton said. “Well, I expect there’s going to be a lot.”

Stimulus packages, he noted, will remain the main culprit.

“Think about it for a moment,” Burton said. “If you added two or three trillion dollars in money supply to the economy, and if there is no inflation, that would mean the two or three trillion you added is real wealth because people have those dollars. Well, logically, if you can create real wealth by just printing money, why not just do that? Why tax anybody or send anybody to work? Just run the printing press.

“What usually happens is when you print that much money, it doesn’t end up being real wealth and inflation erodes the value of all the existing money to exactly subtract that out. That’s where you get the inflation.”

The average price for a gallon of regular gas in the U.S. on Monday was $4.25, up 72 cents from a month ago. Meanwhile, global wheat prices reached a 14-year high of $10.95 per bushel on March 14. Both of these facts can be attributed to the war as one side, Russia, is a world leader in producing natural gas, and the other, Ukraine, is known as the “breadbasket of Europe” due to its agricultural production.   

The conflict in Eastern Europe, though, is only adding to a deeper economic issue, Burton said.

“The administration economists are forecasting that inflation will drop off to 3% by the end of the year,” he said. “That is highly unlikely. You are very likely to be seeing higher inflation for quite a while, because you haven’t factored through all the rent increases and housing increases and stuff like that. Those aren’t even yet in the data. So I think you’re going to see very substantial inflation, having little or nothing to do with Ukraine as this all goes forward.

“So Ukraine, it’s a great international tragedy, especially for the Ukrainian people, but it’s not a huge inflation issue for the U.S. It just aggravates the situation that was already a major problem. It makes inflation a bit worse. But if you take Ukraine and Russia out of the picture, inflation’s still pretty bad in the U.S. and it will stay bad for at least a couple of years.”