High inflation is not primarily the fault of Biden or Trump, economists say

Inflation slowed again in June, bringing further relief to consumers’ wallets.

The consumer price index rose 3% in June 2024 from June 2023, from an annual inflation rate of 3.3% in May, the Bureau of Labor Statistics reported Thursday.

While inflation has not yet returned to policymakers’ long-term target of around 2%, it has fallen sharply from around 9% two years ago, the highest level since 1981.

But why did inflation rise in the first place?

The first US presidential debate last month saw both candidates – President Joe Biden and former President Donald Trump – blame each other for complaints related to inflation during the pandemic era.

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“He caused inflation,” Trump said of Biden during the June 27 debate. “I gave him a country with no, basically no inflation,” he added.

Biden countered by saying that inflation was low during Trump’s tenure because the economy “was flat on its back.”

“He destroyed the economy, absolutely destroyed the economy,” Biden said.

But the cause of inflation is not so black and white, economists say.

In fact, Biden and Trump are not responsible for much of the inflation that consumers have experienced in recent years, they said.

Global events beyond the control of Trump or Biden wreaked havoc on supply and demand dynamics in the U.S. economy, driving prices higher, economists said.

There were other factors as well.

The Federal Reserve, which operates independently of the Oval Office, was slow to act to control runaway inflation, for example. Certain Biden and Trump policies, such as pandemic relief packages, also likely played a role, as could so-called greed.

“I don’t think it’s a simple yes/no answer,” said David Wessel, director of the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution, a left-leaning think tank.

“In general, presidents get more credit and blame for the economy than they deserve,” he said.

That Biden is seen as a driver of high inflation is partly due to optics: He took office in early 2021, around the time inflation rose sharply, economists said.

Likewise, the Covid-19 pandemic plunged the US into a deep recession during Trump’s tenure, pulling the consumer price index close to zero in the spring of 2020 as unemployment rose and consumers cut back on spending.

“In my view, neither Trump nor Biden are to blame for high inflation,” said Mark Zandi, chief economist at Moody’s Analytics. “The blame goes to the pandemic and the Russian war in Ukraine”.

Inflation has many tentacles. At a high level, runaway inflation is largely a matter of supply and demand mismatch.

The pandemic overturned the typical dynamic. For one, it disrupted global supply chains.

There were labor shortages: Illness sidelined workers. Child care centers were closed, making it difficult for parents to work. Others were worried about getting sick at work. A drop in immigration also reduced the supply of workers, economists said.

China closed factories and cargo ships could not be unloaded at ports, for example, reducing the supply of goods.

Meanwhile, consumers changed their buying patterns.

They bought more physical things like living room furniture and desks for their home offices as they spent more time indoors — a departure from pre-pandemic norms, when Americans tended to spend more money on services such as eating out, traveling and going home. movies and concerts.

High demand, which flourished as the US economy broadly reopened, coupled with commodity shortages fueled higher prices.

There were other factors involved.

For example, automakers didn’t have enough semiconductor chips needed to build cars, while rental car companies sold their fleets because they didn’t think the recession would be short-lived, making it more expensive to rent when the economy get well soon, Wessel said.

As Covid cases hit record highs heading into 2022, further disrupting supply chains, Russia’s war in Ukraine “supercharged” inflation, driving higher prices for commodities like oil and food around the world. Zandi said.

As a result, global inflation reached a level “higher than seen in decades,” the International Monetary Fund wrote in October 2022.

“We only have to look at the still high rates of inflation in most other advanced economies to see that much of this period of inflation has had to do with global trends… rather than the specific policy actions of any certain governments (although they certainly play a role),” Stephen Brown, deputy chief economist for North America at Capital Economics, wrote in an email.

Still, Biden and Trump aren’t entirely without blame: They highlighted additional pandemic-era government spending that contributed to inflation, for example, economists said.

For example, the American Rescue Plan — the $1.9 trillion stimulus package that Biden signed in March 2021 — offered $1,400 stimulus checks, increased unemployment benefits and a larger child tax credit for families, among other benefits.

The policy led to “some good things,” such as a strong labor market and low unemployment, said Michael Strain, director of economic policy studies at the American Enterprise Institute, a right-leaning think tank.

But its size was larger than the U.S. economy needed at the time, serving to raise prices by putting more money in consumers’ pockets, which boosted demand, he said.

“I think President Biden bears some responsibility for the inflation that we’ve experienced over the last few years,” Strain said.

He praised the American Rescue Plan added about 2 percentage points to core inflation. The consumer price index peaked at 9.1% in June 2022, the highest since 1981. It has since fallen to 3%.

The Federal Reserve – the US central bank – aims for a long-term inflation rate close to 2%.

“I think if it wasn’t for the American Bailout, the US would still have inflation,” Strain added. “So I think it’s important not to overstate the situation.”

However, Zandi saw the inflationary impact of the ARP as “good” and “desirable”, bringing the economy back to the Fed’s long-term target inflation rate after a prolonged period of below-average inflation.

Trump had also authorized two stimulus packages, in March and December 2020, worth about $3 trillion.

These so-called fiscal policy responses were insurance against a bad economic recovery, perhaps overshooting the weak US response to the Great Recession that plunged the country into high unemployment for years, Wessel said.

The presidents’ fault was that the U.S. released perhaps too much stimulus, but “obviously only in hindsight,” he said.

Biden and Trump also adopted other policies that could contribute to higher prices, economists said.

For example, Trump imposed tariffs on steel, aluminum and some goods imported from China, which Biden kept largely intact. Biden also imposed new import taxes on Chinese goods such as electric vehicles and solar panels.

Fed officials also have some responsibility for inflation, economists said.

The central bank uses interest rates to control inflation. Rising rates raise borrowing costs for businesses and consumers, cooling the economy and thus inflation.

The Fed has raised rates to the highest level in nearly two decades, but was initially slow to act, economists said. It first raised them in March 2022, about a year after inflation began to rise.

He also waited too long to rein in “quantitative easing,” Strain said, a bond-buying program meant to stimulate economic activity.

“That was a mistake,” Zandi said of the Fed’s policy. “I don’t think anyone would have taken it right given the circumstances, but in hindsight it was a mistake.”

Some observers have also pointed to so-called greed — the notion of corporations taking advantage of the high inflation story to raise prices more than necessary, thus boosting profits — as a contributing factor.

This is unlikely to be a cause of inflation, although it may have contributed slightly, economists said.

“To the extent that something like that happened — which I’m not sure it did — it would be a very small factor in the inflation we had,” Strain said. He estimates that the dynamics would have added less than 1 percentage point to the inflation rate.

“Companies are always looking for an opportunity to raise prices when they can,” Wessel said. I think they benefited from the inflationary climate, but I don’t think they caused it.