by Philip Pilkington
Wednesday, 1
December 2021

The vaccine programme won’t stop inflation

The Federal Reserve can't keep using Covid as an excuse
by Philip Pilkington
Federal Reserve Chairman Jerome Powell

The Federal Reserve has finally recognised the obvious: the inflation we are experiencing is due to supply chain and labour market issues caused by government responses to the pandemic. The OECD concurs.

Earlier this week, the head of the Fed, Jerome Powell, said that:

The recent rise in Covid-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation…Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labour market and intensify supply-chain disruption. 
- Jerome Powell

Finally! Only a few weeks ago, drawing a link between inflation and government Covid-19 responses was, as the Germans say, Streng Verboten — strictly forbidden. So what explains this delayed admission?

Parsing the commentary closely, a new narrative seems to be emerging. We might call it the ‘pandemic inflation naturalistic fallacy’. Powell seems to assume that because the inflation is a result of the virus, it will subside once the virus does. But this rationale is based on the vaccine programme coming to the rescue. Powell likely believes that the vaccines will, at some point, end the pandemic and so we should simply tolerate inflation until then.

This does not fit with the evidence that is emerging. We have known for some time that the vaccines are relatively ineffective at stopping transmission, especially given the rapid mutation of the virus. Since case numbers are the metric that we use to promote economy-damaging policies, it is hard to see the vaccine helping here.

Even if we assume that the vaccine programme will reduce the number of Covid deaths and hospitalisations, it is not proving as effective as was hoped. Consider central Europe. Austria and Germany have fully vaccinated 87% and 86% of their vulnerable populations respectively. Yet the number of Covid deaths in the latter looks roughly the same as it did at the beginning of last winter, pre-vaccine. Austria, meanwhile, is on a similar trajectory based on week-on-week growth.

Why can the Fed not see that the vaccines are not working as promised? They can pretend that the virus gives them an excuse for the inflation only insofar as they assume that the virus will soon disappear. If it does not, then the Fed’s official position can be read as saying: “Accelerating inflation is fine because it is ‘natural’”.

Economists are eventually going to have to face up to it: the economy and the public health measures are completely at odds with each other. Once they face up to that, they will have to recognise that it is their job to say this explain to the public that there are huge trade-offs between these endlessly extending restrictions and general prosperity.

Join the discussion

To join the discussion, get the free daily email and read more articles like this, sign up.

It's simple, quick and free.

Sign me up
Notify of
Most Voted
Newest Oldest
Inline Feedbacks
View all comments
Andrea X
Andrea X
9 months ago

Why are the economists supposed to face up a stark reality and not the politicians who are ultimately responsible for what befalls us?
Maybe the economists should have some heart to heart with the politicians and have them see sense.

J Bryant
J Bryant
9 months ago

I like this author. His short articles appear to be Unherd’s limited commitment to covering economic issues (although I have a feeling the economy will soon be the only thing anyone is talking about).
I agree with the author’s analysis. Honestly, did anyone apart from professional economists not see the clear connection between pandemic response measures and inflation?
Here’s what I don’t understand (and I hope I don’t trigger a massive, angry response to my question–some cool analysis would be appreciated): where I live the vaccines do, indeed, seem to be greatly reducing the incidence of serious covid disease and death, although, as the author notes, they don’t stop transmission. I trust the local data I’ve seen. So why are countries like Austria, with high vaccination rates, seeing an increasing death rate? Is it a function of an old and sick population? In other words, do the vaccines reduce serious covid illness or not?

Andrea X
Andrea X
9 months ago
Reply to  J Bryant

From what I understand in Austria there are relatively few vaccinated (but not THAT few) so you have a larger group of the population to “infect”.
More interesting is Italy with high uptake and very strict vaccine passport, still cases are in the up. Let’s see where hospitalisations follow suit.
The point is, AFAIAC, this is as good at it is going to get, so might as well get on with it.

James Stangl
James Stangl
9 months ago
Reply to  Andrea X

Spot on, Andrea.

At this point, my view of the vaccines is that they *may* reduce the risk of serious cases requiring hospitalization in high-risk groups, but that the speed with which COVID-19 mutates negates any sanitizing effects whatsoever. Which should be obvious to anyone with any acquaintance to how coronaviruses and other respiratory viruses act. This is why trying to produce effective vaccines against these viruses that stay the course is so difficult.

But for St. Anthony of Fauci and all the politicos, “when all you have is a hammer, everything looks like a nail.”

Giles Chance
Giles Chance
9 months ago

This is a relatively academic point. What is more to the point is that global price inflation has been much higher, and lasted so far for longer than forecasts made early in 2021. Forecasts made today for the period 2022/ 23 are probably also much too optimistic. Interest rates have to rise, and Powell’s comments this week bring us closer to that certainty. For a highly-indebted society (Government, corporations and households), even a small rise in rates will have a large impact – on profits, on Government solvency, on taxes, on asset prices. Stand by for a major shock. I call it Credit Crisis phase 2.

Last edited 9 months ago by Giles Chance
Jon Hawksley
Jon Hawksley
9 months ago

Inflation and deflation depend upon the balance in supply and demand. Generally supply is fixed in the short term so changes in demand have the greatest effect. Demand is limited by available funds so the willingness of lenders matters, which depends upon how expansive or cautious they are to lend. They are also constrained by liquidity requirements set by central banks. Interest rates are generally viewed as a control on demand but in practice fear and greed are far more important and they are driven by sentiment. With the pandemic demand is also driven by opportunity to spend and supply is constrained by disruption to supply chains. Lockdowns reduced the opportunity to spend and whilst many lost earnings there were many who saved. The savings have led to pent-up demand and the disruption has reduced supply – thus inflation.
What is needed is for the pent-up demand to be released more slowly – in step with supply but there is no mechanism to do that – people either have savings or are willing to borrow on credit cards at high interest rates, greed will not be constrained by the bank rate going up. However adding five percent to mortgage rates will hurt borrowers badly because they budgetted for very low interest rates. It will create defaults that will frighten lenders so we may end up with some of the population driven by greed and some driven by fear.
Then there is inflation causing wage increases feeding a spiral in inflation.
This uncharted territory and I doubt that any of the economic models can model this properly.