Inflation blame game: sorting out the culprits

Politicians on both sides will seek to spin the numbers to their advantage. But the truth about who or what is actually responsible for inflation figures not seen since the 1980s is more complex than any political argument or anti-Fed screed.

“It’s not just the Fed or the end of infrastructure or the exact type of stimulus or anything else,” said Harvard economist Megan Greene. “I actually thought the Fed was successful last year waiting for inflation to come down on its own as the pandemic subsided. Then Omicron hit China and Russia invaded Ukraine. A lot of it is just very, very bad luck.

Here’s what the numbers show and what pundits told POLITICO about what’s behind an inflation rate that has 75% of Americans saying the nation is on the wrong track and crashing the ratings. Biden endorsement below 40 percent.

Spoiler alert: There are no unique villains. And everything is quite complicated.

“Putin’s Price Rise”

Biden and Democrats say the high prices are largely the result of Russian President Putin’s invasion of Ukraine, which sent oil and food prices skyrocketing.

“Inflation is still too high and Putin’s price hike continues to impact food and energy prices,” Biden said in a statement Friday after the latest figures were released. “There is still work to be done, and fighting inflation is my top economic priority.”

Biden is correct that the invasion has rattled the oil market and contributed to higher inflation over the past two months. But the prices began to rise sharply long before Putin shocked the world and attacked Ukraine at the end of February.

Inflation has fallen to a pandemic trough of 0.1% in May 2020 even as the Fed and Congress began pumping trillions into the economy and the central bank kept interest rates at historic lows. But as soon as some Covid restrictions started to be lifted in the summer of that year, inflation started to rise, strengthening in February 2021. The consumer price index, the best-known indicator of inflation, reached 7.5% in January this year. It was 8.3% in April compared to the previous year.

Biden was also right that energy costs accounted for nearly 70% of the monthly increase in inflation from February to March this year as markets reacted to the war. But many believed Biden was saying that 70% of inflation last year came from the war. This is not the case. Even after stripping out the energy hit, the annual rate in March would have been above 7%, still easily offsetting wage gains of around 5%. Core inflation was 6.2% in April.

Wendy Edelberg, director of the Hamilton Project and senior economic studies fellow at the Brookings Institution, said the war had certainly contributed to recent inflation, further damaging supply chains and driving up energy prices, but not as Biden described it.

“The truth is that consumer demand fell off a cliff in the spring of 2020 when the virus hit and it rebounded, it was inevitably going to be messy,” she said. “But the ingredients that explain why the economy has been as strong as it has been and the incredibly robust way demand has rebounded before supply has completely surprised me.”


Republicans are hammering Democrats on the midterm campaign trail for what they like to call ‘biden-flation’, blaming the sharp price spike on overly generous stimulus that fattened consumers’ wallets during the pandemic and discouraged them from returning to work. This clearly has an impact, with polls showing dismal ratings for Biden’s handling of the economy.

Debate continues to rage over the full impact of Biden’s $1.9 trillion US bailout, passed in March 2021 with only Democratic votes. And economists say Republicans are probably right that at least part of the inflation hike comes from the plan’s $1,400 direct payments to eligible Americans and an extension of enhanced unemployment benefits and unemployment benefits. child care tax credits until September of last year.

This injection of cash into the economy came after the roughly $4 trillion in Covid emergency aid was passed under the Trump administration. It is difficult to determine exactly how much inflation resulted from the additional stimulus.

But price increases in the United States began to overtake other developed countries last year, according to a study by the San Francisco Fed, indicating that additional spending has played some role in accelerating inflation. Other advanced economies have faced similar issues with supply chain disruptions and supply-demand mismatches. But the US has worse inflation. Inflation in the euro zone soared to 7.4% in April, still below the United States but lifted by a sharp rise in energy costs following the invasion of Ukraine. It was 5.9% in February.

“It was the biggest fiscal and monetary response in history and that’s great, but the elements of how it was delivered weren’t the best and we probably overdid it,” he said. said Brett Ryan, senior US economist at Deutsche Bank, of the United States. from one point of view, all expenses worked, [and] we bounced back very quickly. But all of these stimulus checks have driven demand up very quickly and left already strained supply chains even further behind the curve.

Did the Fed blow it up?

The Fed is the primary inflation-fighting authority in the United States, so naturally it comes under scrutiny when prices rise significantly. The central bank’s mandate, after all, is to keep inflation low – its target is around 2% – while promoting full employment.

So did Fed Chairman Jerome Powell and his colleagues screw it all up by keeping interest rates low for so long and continuing to prop up the economy with hundreds of billions of dollars in government purchases? ‘assets ? Can we blame it all on the Fed, as some Wall Street economists and traders do?

Not all, economists say, but one fault clearly lies with the central bank.

Powell was a key early proponent of the idea that price increases would be ‘transitional’ and would subside more quickly as supply chain issues were resolved and more people returned. at work. Biden and the White House also embraced the term before it had to be dropped.

Because inflation proved to be more durable, the Fed had to quickly shift gears in December and say it would withdraw its highly stimulative policies. Uncertainty about how far and how quickly the Fed will have to move has created huge volatility and big losses for equities this year.

“The Fed is now so behind inflation that people are worried about the consumer,” said Jim Paulsen, chief economist at the Leuthold Group.

Central bank advocates say Powell faced an almost impossible task. He came under enormous bipartisan pressure to keep rates low to stimulate the economy – including from then-President Donald Trump long before the pandemic – making a much earlier pivot to a policy difficult. More Strict. And how much of a game-changer would have been an earlier change is unclear.

“If you had perfect pullback, you would come back and it probably would have been better for us to raise rates a little earlier,” Powell said in an interview with Marketplace earlier this month. “I don’t know what difference it would have made, but we have to make decisions in real time, based on what we knew then, and we did our best. Now we see the situation clearly and we are determined. to use our tools to bring us back to price stability.”


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