U.S inflation remained stubbornly high in August, with prices increasing at an annual rate of 8.3%. While this higher-than-expected increase has disappointed some economists, U.S. Federal Reserve Chair Jerome Powell’s commitment to raising interest rates—which he emphasized in his recent Jackson Hole speech—will surely dent U.S. inflation by squeezing demand. And the prospect of imminent monetary tightening has helped to strengthen the dollar, which has breached parity with the euro and reached a 20-year high against the yen, easing import-led inflation.
But today’s global inflationary surge is fueled by more than just domestic demand. Supply-chain disruptions related to China’s restrictive zero-Covid policy, the effects of the Russia-Ukraine war on food and fuel prices, and rising labor costs all play a part.
These supply-side factors largely fall outside of what the Fed can control. The U.S. economy, however, is uniquely positioned to overcome this particular species of inflation, owing to its relative energy and food independence, abundance of immigrant labor, strong production capacity, and access to the capital needed to maintain and increase domestic manufacturing.
For example, the United States is less affected by soaring energy prices—a central driver of current inflation—because it is a net energy exporter. In 2021, U.S. energy exports reached 25.2 quadrillion British thermal units (Btu), exceeding energy imports by about 3.8 quadrillion Btu. And in the first half of 2022, it exported more liquefied natural gas than any other country. Europe, by contrast, imported roughly 58% of the energy it consumed in 2020. In fact, all 27 members of the EU have been net importers of energy since 2013.
Even though American wages have increased markedly in recent months—unit labor costs jumped by 9.3% between the summer of 2021 and June 2022—the U.S. continues to attract and rely on immigrant labor flows, which tend to have a dampening effect on wage inflation, albeit with a lag. According to the Washington, DC-based Migration Policy Institute, 13.7% of the U.S. population (or 44.9 million people) were foreign-born in 2019, compared to less than 10% during much of the second half of the twentieth century. Since 2005, more than one million people per year, on average, have obtained US permanent resident status.
Admittedly, there is some debate among academic economists about the extent to which higher immigration dampens wages. But a 2017 review of studies by the Cato Journal determined that, on average, a 10% increase in the number of immigrants is correlated with a 2% decrease in wages. Even if wages do not fall in the short term, higher immigration would likely increase the labor supply and reduce wage inflation over time.
Finally, the U.S. accounts for 18% of the world’s manufacturing capacity, making it the world’s second-largest manufacturer, after China. Manufacturing accounts for $2.3 trillion of US GDP, employs 12 million people, and was recovering in the 10 years before the pandemic. According to McKinsey, the U.S. economy added 1.3 million manufacturing jobs between 2010 and 2019.
In the wake of the Covid-19 pandemic, global supply-chain disruptions have forced up import prices, as U.S. households rely disproportionately on imported consumer goods. Due to these supply constraints, corporations will most likely continue to favor resilience over cost-cutting and diversification, meaning a pivot of manufacturing back to the U.S.
To be sure, reshoring could lead to a one-off increase in labor costs as employers bring jobs back to the higher-wage U.S. economy. But over time, the U.S. would be able to avoid the price vagaries of overreliance on foreign-based supply. Given that its strong domestic production capacity partly shields the U.S. economy against more import-driven inflation, reshoring manufacturing will lead to less price volatility and, ultimately, lower inflation.