Republicans are engaged in a cynical game of pin the inflation on the donkey. Ask them about law-breaking at the highest levels of government or threats to elections and constitutional democracy, and they are likely to reply that inflation is too high and it’s
They’re half right. Inflation is too high. But since blaming Mr. Biden will likely persist through the November election, let’s examine the charge.
One element of truth is that both the administration and the Federal Reserve stuck with antirecession policies like big spending and low interest rates too long, thereby helping overheat the economy. But let’s remember the reasons and think about the magnitudes.
The U.S. economy blasted out of the Covid-induced recession of 2020 like a rocket, soaring at a 34% annual rate in the third quarter of 2020 and then at nearly a 6% average annual rate over the next three quarters. Much of that rapid recovery was powered by those highly stimulative fiscal and monetary policies. And it’s a good thing we had them. The U.S. recovery was far faster than Europe’s.
But when should that massive fiscal and monetary stimulus have been withdrawn? Probably not in the first months of Biden’s presidency, which is when he pushed his American Rescue Plan through a narrowly 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 the ARP’s $1.9 trillion price tag (over 10 years) was probably too large, as some critics warned at the time. But Mr. Biden was focused on maintaining job growth; and besides, the inflationary consequences of the ARP were probably negligible. Moodys’
has estimated that the act added a mere 0.1% to today’s inflation rate. Why so little? At about $190 billion a year, ARP spending amounted to only 0.8% of 2021’s gross domestic product.
The Federal Reserve made a similar mistake, for the same reason, on a grander scale. According to its favorite measure, the PCE (personal consumption expenditure) deflator, the 12-month inflation rate in January 2021 was 1.4%—well below its 2% target. With inflation too low and the durability of the recovery still in doubt, it seemed too soon to raise interest rates and stunt job growth.
So the Fed waited. A quarter later, inflation was on the rise. But with the unemployment rate averaging 5.9%, it would have taken a lot of both chutzpah and foresight to raise interest rates that early.
So the Fed waited some more. Just three quarters later, it was too late. The unemployment rate was down to 4% and falling. The 12-month PCE inflation rate was up to 6% and rising. By the time the Fed started to raise interest rates in March 2022, it was clearly behind the proverbial curve.
The Fed’s error in timing seems to have had two main sources. One is that inflation burst out of the gates, catching the central bank flatfooted. Using the PCE measure again, the inflation rate leapt 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: Covid, oil prices and food prices.
Start with Covid, where we encounter the second source of the Fed’s timing error: Team Transitory—which included the Fed, the White House and me—was overly optimistic about how soon Covid-related inflation would dissipate. Why? Mainly because we overestimated how quickly the economy would work around supply-chain issues ranging from reduced chip production and a shortage of container ships to inadequate supplies of cardboard boxes and truck drivers. I estimated last month that at least 1.3 points of today’s core PCE inflation is attributable to the uneven recovery from the Covid recession. Mr. Zandi estimated that it’s 2 points of additional CPI inflation.
I conceptualize the failure to anticipate how long supply-chain problems would last as placing excessive faith in capitalism. We economists tend to believe that profit-seeking capitalists will sniff out, act on and profit from high prices whenever and wherever they pop up. You know: Buy low, sell high. That’s happening, but far more slowly than I imagined. In addition, new waves of Covid keep coming.
Much of the rest of the error in forecasting inflation can be traced directly to the war in Ukraine, which has severely constricted the world’s supplies of oil, wheat, fertilizer and other products. CPI data show that food inflation and energy inflation together have added about 2.6 percentage points to the overall inflation rate over the last 12 months.
So pinning the inflation tail on Joe Biden amounts to blaming him for war-induced shortages and the Fed’s mistiming. It is a bum rap.
Mr. Blinder, a professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve, 1994-96.
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