Biden shouldn’t blame inflation

Republicans are engaged in a cynical game of pinning inflation to the donkey. Ask them about breaking the law at the highest levels of government or threats to elections and constitutional democracy, and they are likely to answer that inflation is too high and it’s Joe Biden’s fault. .

They are half right. Inflation is too high. But since the blame on Mr. Biden will likely last through the November election, let’s consider the accusation.

One element of the truth is that both the administration and the Federal Reserve have stuck with anti-concession policies like big spending and low interest rates for too long, thus helping the economy grow to overheat. But let’s remember the reason and think about the importance.

The US economy came out of the Covid-induced recession in 2020 like a rocket, skyrocketing at a 34% annual rate in the third quarter of 2020 and then averaging nearly 6% annualized in the second quarter of 2020. next three quarters. Much of that rapid recovery has been attributed to those highly accommodative monetary and fiscal policies. And that’s a good thing we have them. The recovery of the US is much faster than that of Europe.

But when should that massive monetary and fiscal stimulus be withdrawn? Perhaps not in the first months of Biden’s presidency, which is when he pushed his Rescue American Plan through a narrow-minded Democratic Congress. In January 2021, the unemployment rate was 6.4% and the 12-month CPI inflation rate was 1.4%.

It is true that ARP’s $1.9 trillion price tag (over 10 years) was probably too big, as some critics warned at the time. But Mr. Biden is focused on sustaining job growth; and besides, the inflationary consequences of ARP are probably insignificant. Moody’s’ Mark Zandi has estimated that the move adds just 0.1% to today’s inflation rate. Why so little? At about $190 billion a year, ARP spending represents just 0.8% of 2021’s gross domestic product.

The Federal Reserve made a similar mistake, for the same reason, on a larger scale. According to their preferred measure, the PCE (personal consumption expenditure) deflation, the 12-month inflation rate in January 2021 was 1.4% – well below the 2% target. With inflation so low and the durability of the recovery still in doubt, it seems too soon to raise interest rates and dampen job growth.

So the Fed waited. A quarter later, inflation picked up. But with an average unemployment rate of 5.9%, it will take a lot of time and foresight to raise rates so soon.

So the Fed waited more. Just three-quarters later, it was too late. The unemployment rate has dropped to 4% and is falling. The 12-month PCE inflation rate has reached 6% and is on the rise. By the time the Fed started raising rates in March 2022, it was clearly behind the language curve.

The Fed’s timing lapse seems to have two main causes. One is a burst of inflation, which puts the central bank on a standstill. Using the PCE measure again, the inflation rate spiked from 1.4% in January 2021 to 4% in May 2021 — and not because of anything Mr. Biden did. The main factors are well known: Oil prices, oil prices and food prices.

Starting with Covid, where we run into the second source of the Fed’s timing error: The Transitory team — which includes the Fed, the White House, and me — was overly optimistic about how Covid-related inflation would dissipate as soon as possible. how. Why? Mainly because we overestimated the speed at which the economy worked around supply chain issues, from falling chip production and a shortage of container ships to the supply of cartons and financial resources. truck drivers are not enough. I estimated last month that at least 1.3 points of core PCE inflation now is due to an uneven recovery from the Covid recession. Mr. Zandi estimates that CPI inflation increased by 2 points.

I conceive of how long supply chain problems can be unforeseeable by placing excessive trust in capitalism. We economists tend to believe that profit-seeking capitalists sniff, act, and profit from high prices whenever and wherever they pop up. You know: Buy low, sell high. It’s happening, but much slower than I imagined. Also, new waves of Covid keep coming.

Much of the remaining error in forecasting inflation can be traced directly to the war in Ukraine, which has severely limited the world’s supply of oil, wheat, fertilizer and other products. CPI data shows that food inflation and energy inflation combined have added about 2.6 percentage points to the overall inflation rate over the past 12 months.

So tying the inflation tail to Joe Biden would mean blaming him for the war shortages and the Fed’s misjudgment. It’s a rap bum.

Mr. Blinder, professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve, 1994-96.

Wonderland: The White House now says the US economy is ‘in transition.’ They got that part right. Image: Getty Images / The Universal Archive via AP Composite: Mark Kelly

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Mike Fahey

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