CNN does most of the work, so I’ll refer you to their article here, and summarize highlights and correct errors.
1. The blame game
The headline says, “Washington can’t have an honest debate about inflation,” which is true. That’s because “it’s largely a charade,” adding, “with enough artifice to go around among all the actors involved.” Republicans are blaming Democrats to get a midterm election advantage, while the Biden administration is trying to look like they’re doing something about it when they can’t.
2. The pandemic is partly responsible
CNN says, “Inflation has surged in countries around the world as pandemic-hobbled economies lurched back into stride,” straining supply chains and altering “patterns of consumer demand that businesses weren’t prepared to meet.” The fact inflation is everywhere should be enough to convince thoughtful people that Biden didn’t cause it. (How, for example, would he cause inflation in the U.K., Japan, or China?)
The pandemic was highly disruptive, closing factories and ports, causing goods shortages. And that happened right when a lot of consumers shifted their spending on services to goods purchases because travel, restaurants, theaters, etc., were shut down. Which exacerbated the goods shortages. Warehouse and shipping bottlenecks (not enough truck drivers, etc.) added to the problem.
The truck driver shortage was years in the making, long before Covid-19 appeared on the scene. Lousy pay and bad working conditions drove people out of the occupation and deterred new blood from entering. Many of the drivers who remained were aging veterans of the industry on the cusp of retirement. The driver shortage left goods stranded on docks and in warehouses.
3. Strong consumer spending keeps prices elevated
There’s no question the pandemic created pent-up demand, and CNN claims “families up and down the income scale, thanks to Covid relief checks, generally still have more money than before the pandemic; in the lingo of economic analysts, ‘household balance sheets’ still have ‘excess savings.'” This is disputed by some economists, who contend those savings have been exhausted and “there is little to no excess savings left in the economy” (quoted from Barrons, May 23, 2022, p. 22).
CNN also claims that “while inflation is eroding buying power, consumer ‘have not been ‘crushed’ badly enough to prevent them from spending at a steady pace.” But retail sales, adjusted for inflation, are declining — which caused stocks of retailers like Target and Walmart to plunge sharply last week. Gross domestic product (GDP) shrank by 1.4% in the first quarter of 2022, so the U.S. probably is already in recession.
The fact is, consumers are being crushed. Wages are rising about 5.6%, while inflation is over 8.6%, so workers are losing purchasing power. There’s plenty of evidence that consumers are strapped and cutting back their spending. For example, (1) banks report increasing use of credit cards to pay for basic bills, (2) businesses report unsold goods piling up in warehouses, and (3) stores report shoppers are switching to lower-priced brands.
4. The Washington inflation debate is largely “performance art.”
Absolutely true. Republicans are trying to pretend this inflation, which has multiple causes, some years in the making (e.g., the housing shortage, which predates both the Trump and Biden administrations), was caused by Biden and the Democrats. That’s political theater and nothing else, and contains no promise of solutions for beleaguered consumers.
But Biden is playing this cynical game, too. As CNN explains, “reporters continually question the President about solutions to rising prices, even though, in a free-market economy, no White House has much power to bring them down. The President’s role is to answer the questions. For unhappy voters, ‘not much I can do’ doesn’t cut it. So Biden often resorts to political performance art. He joins fellow Democrats in assailing greedy corporations, even though corporations respond to market forces whether inflation is high or low — as has been the case for more than 30 years. … Like previous presidents under similar pressure, Biden has demanded investigations of ‘price gouging.’ Last week, House Democrats passed an anti-gouging bill. The only expected result: a few news headlines.”
5. The 900-lb. gorilla in the room is the Federal Reserve.
Ever since the 2007-2008 financial crisis, and the Great Recession that followed, the Federal Reserve has combated disinflation and a potential depression with highly stimulative monetary policies. The Fed overshot and pumped too much money into an economy whose productive capacity was constricted by the pandemic and a growing labor shortage (made worse by the GOP’s anti-immigration policies). The Fed’s lax policies didn’t entirely cause this inflation, but are a major contributor.
Since 2010, the Fed has been chaired by Republican appointees: Ben Bernanke (appointed by George W. Bush) and Jerome Powell (appointed by Trump). Unlike Bernanke, an economist who specialized in studying the Great Depression, and whose Fed tenure was marked by low inflation, Powell isn’t an economist; he was a Wall Street lawyer before coming to the Fed. And Powell has been over-cautious about taking his foot off the monetary accelerator. Visualize a driver approaching a curve too fast and waiting too long to use the brakes to slow down. Bam, into the guardrail. That’s how Powell has steered the economy into inflation.
Biden can be blamed for reappointing him, but if you’re going to do that, you should also blame Trump for appointing him in the first place. You should also realize that from 2007 to 2019, prior to the pandemic, the biggest threat to the economy was deflation and the Fed struggled to keep inflation at a “healthy” rate of 2% (which was thought to promote economic growth). So it’s not like these policies were inappropriate. They were the right remedy for the economic problem that existed at that time. And the pandemic crisis obviously didn’t call for slamming the brakes on the economy. Powell’s fault was in not knowing when to apply the brakes, and not applying them enough.
But you should also realize that Fed stimulus, which by the way is still in place, accounts for only about a third of this inflation. Which means the Fed can’t cure it by itself. Pent-up pandemic demand, pandemic-caused shortages and bottlenecks, growing international conflict that’s disrupting the globalization that provided the world with cheap goods, high oil prices caused by years of low oil prices and now exacerbated by the war in Ukraine, and the housing shortage caused by the 2007 housing crash, commodity shortages. One of the major causes of this inflation is aging demographics: The entire world is getting older, which is shrinking the workforce through retirements and reducing productivity and thus the efficiency of economies.
There is no free lunch in economics. You can’t consume what you don’t produce. Printing more money doesn’t create more goods and services. Money supply needs to keep up with economic growth (which is why a gold standard doesn’t work), but if the Fed overshoots on expanding money supply you’ll get inflation. This didn’t happen in 2007-2009 because people were hoarding cash, so the supply of money in circulation was actually shrinking then, but it’s happening now because people are spending the money on a much smaller supply of goods and services. The Fed, and Powell particularly, has been too slow at adjusting to that.
But my main point here is that economic forces, not political rhetoric, will dictate the course of inflation. Part of it depends on the pandemic running its course. There are international factors we’ll have to live with for a while. The Fed needs to do its part, and that means raising interest rates, reducing its stockpile of Treasury bonds and mortgage securities, and tightening credit. This can’t be done without incurring a recession, so Powell needs to stop pussyfooting around, accept that fact, and get it over with. Like curvy roads, inflation and recessions don’t last forever. But somebody has to steer, and use the accelerator and brakes appropriately. Anyone who’s ever driven a car knows that.