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Sunday, August 15, 2021
Inflation a Crucial Key to U.S. Infrastructural Plan
ANBOUND

On August 10, several months of discussions, the U.S. Senate passed a USD 1.2 trillion cross-party infrastructure investment bill. In the early morning of August 11, the Senate again approved a USD 3.5 trillion budget. In terms of procedure, both bills are subject to deliberation and approval by the House of Representatives. At the moment, the Democrats who control the House of Representatives have put the vote on hold. They demanded that the USD 1.2 trillion infrastructure plan be voted on after the USD 3.5 trillion plan had been approved.

According to the plan, the new infrastructure bill will add about USD 550 billion in expenditures in addition to providing funds for existing federal public works projects.

The investment will be in major projects such as roads and bridges within 5 years and may be earmarked for the improvement of public transportation facilities such as railways and airports. In addition, there will be an improvement in the water supply and power supply systems, as well as in the broadband network. The scale of the infrastructure investment bill is significantly smaller than the initial USD 2.25 trillion infrastructure plan proposed by the Biden administration. Initially, U.S. President Joe Biden proposed a USD 6 trillion budget plan, which was later reduced to USD 3.5 trillion. If this USD 3.5 trillion budget plan is implemented, it will provide a significant boost to the U.S. economy.

There is concern that expanding the U.S. budget with infrastructure as the core will add trillions of dollars in debt, causing the U.S. to remain heavily indebted.

However, ANBOUND's founder Chan Kung, believes that rising debt is not an urgent problem for the United States, where inflation is already quite high thus posing a real problem. In June, the U.S. CPI reached a 13-year high of 5.4%, an increase of 4 percentage points from the end of the previous year. The European and Japanese CPIs of the month increased by 2.2 and 1.4 percentage points respectively from the end of the previous year. According to data released by the U.S. Department of Labor on August 11, the U.S. Consumer Price Index (CPI) rose 5.4% year-on-year in July, the largest single-month year-on-year increase since 2008.

If the USD 1.2 trillion infrastructure plan is added to the USD 3.5 trillion budget, will it increase inflation in the United States? Before answering this question, the nature and causes of current inflation in the United States should be understood first.

According to the researchers at ANBOUND, inflation can be divided into two types if analyzed in terms of causes. The first is "goods-derived inflation," which is caused by rising commodity prices, and the second is "currency-derived inflation," which is caused by an excess of money being issued.

Which type of inflation is the United States facing? If the rise in commodity prices is short-term, incidental, and influenced by logistical barriers, it is more likely to be due to a sharp rebound in consumption driving demand, combined with the epidemic's impact on the supply chain. If there is an impact on inflation, it is "goods-derived". In the case of "monetary inflation", most commodities will be affected over a longer period. However, the latter is less likely to occur. It is important to note that the distinction between the two causes of inflation has both research and policy implications. Different judgments about the causes of inflation will lead to completely different policies.

ANBOUND researchers believe that the current inflationary pressures in the U.S. are largely due to supply chain adjustment issues. However, if this USD 3.5 trillion budgetary master plan is enacted, the problem will become more complex. The U.S. is not a productive society, but a consumption-based society that depends on the importation of many products. Thus, the massive expansion of investment will not be followed by a transformation into inventories and competitive prices, which will tend to keep prices under control, but rather by massive imports that could lead to higher prices and even result in prolonged inflation. Therefore, we believe the U.S. debt pressure is not a huge problem and can be handled, but it is the inflationary pressure that may turn out to be a bigger issue. Of course, the prerequisite is that the House of Representatives finally approves the USD 3.5 trillion plan.

Chan Kung is of the opinion that the aim is for the expansion of the U.S. consumer market is to maintain the country's position as the world's largest marketplace and for it to impact the global market altogether. Simultaneously, the U.S. dollar exchange rate may have to be softened in the future. For the Federal Reserve to solve this problem, the United States can implement a policy of interest rate increases to mitigate the impact. Prices in the logistics industry, such as container shipping, may remain high in productive countries other than China, thus benefitting from the United States' fiscal overhaul. If the above analysis holds, the U.S. could take some controlled, restrictive measures concerning imports to encourage the USD 3.5 trillion in investment to stay in its own soils as much as possible, rather than being heavily converted into import demand. If there is too much reliance on imports, the U.S. will be subjected to upward pressures on costs domestically, but various productive countries will profit from it. This situation cannot help but create a political issue and will raise strong concerns in U.S. society. Henceforth, the real problem in the U.S. is inflation.

In addition, Chan Kung also stated that such inflationary pressure in the United States will last for about two years before returning to normal. Inflation may last even longer if we consider the global supply chain restructuring process.

In the United States, the year-on-year increase in CPI in July remained high, indicating that inflationary pressures are difficult to alleviate in the short term. With the slow increase in COVID-19 vaccination rates and the continuous reopening of businesses in the context of supply chain bottlenecks and labor shortages, consumer demand has risen to exceed enterprise production capacity, causing prices to rise further.

At the same time, market participants are worried that during the period of rapid economic recovery, large-scale fiscal policies and ultra-loose monetary policies may further stimulate demand growth and promote a continuous rise in inflation.

We took note of a recent article by Paul Krugman in the New York Times that also discusses the issue of inflation in the United States. His main point of view is that once the USD 3.5 trillion funds are released into the market, the resulting inflation will be a problem that the U.S. will have to deal with. However, what is the result, and are there any inflationary risks? It all depends on how the USD 3.5 trillion is spent. It should be acknowledged that Krugman's point of view is reasonable, and this is also one of the prerequisites for us to discuss the issue of inflation.

Of course, the implementation of large-scale stimulus programs in developed countries has the potential to cause inflation in the consumer society. Although there are tools for dealing with inflation, the effects of these policies are frequently hedging and offsetting each other, and they cannot truly alleviate the pressure problem.

Final analysis conclusion:

If the United States' USD 1.2 trillion infrastructure plan is implemented, along with the USD 3.5 trillion fiscal budget, it will become a major stimulus for the country's economy. This will not only help the U.S. economy recover but will also raise inflationary pressures.

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