Biden and Powell are getting a bum rap on inflation

To hear many talking heads and op-ed writers tell it, America’s sky-high inflation – 8.6 percent in May – can be laid entirely on the doorsteps of President Biden and Federal Reserve Chairman Jerome Powell. Some of these claims are absurd on the face of it: for example, that the Biden administration is responsible for soaring gasoline prices, which in reality have been propelled upward by a nearly $100 per barrel rise in the world price of crude oil.  

Other claims are merely exaggerated: that today’s surging prices owe to the profligacy of the $1.9 trillion COVID-19 relief plan Biden signed last year, or to the Fed’s failure to act quickly enough to tighten monetary policy. But the fact of the matter is that inflation is a global phenomenon, and all kinds of countries with all kinds of policies are now confronting the steepest rise in prices they’ve seen in 40 years. And the lion’s share of this inflationary surge has been, at least so far, beyond the control of governments or central banks. 

Even before the full effect of Russia’s invasion of Ukraine hit the global economy, most advanced economies were experiencing inflation well in excess of their (usually) 2 percent targets. In March, for example, core inflation hit 3.5 percent in Germany, 5.5 percent in Canada and 5.7 percent in the United Kingdom. (It’s useful to focus on so-called core inflation rates because, unlike headline inflation rates, these exclude the direct effects of skyrocketing food and energy prices, which are largely beyond the control of national fiscal and monetary policies.) Clearly, the factors pushing up inflation in the United States (supply chain disruptions, rebounding demand as the pandemic eases and the pass-through of rising food and energy prices into the prices of other goods and services) have been at work throughout the global economy.

Notably, the United States topped the leader board of advanced economies, with core inflation coming in at an eye-watering 6.5 percent. But most of this price increase has had little to do with recent U.S. policies. Research with my colleagues John Kearns and Michael Strain shows that countries that had comparatively high inflation before the pandemic have comparatively high inflation today as well. 

For example, Switzerland, a perennially low-inflation country that experienced almost no price increases in the years before the pandemic, registered core inflation of only 1.4 percent in March. Conversely, in Iceland, where inflation well exceeded 2 percent before 2020, it hit 6.2 percent in March. The reasons for this are not mysterious: In economies with lower inflation, wages and prices are less likely to be sensitive to expectations of future inflation, and those expectations, in turn, are less likely to respond to supply shortages and soaring energy and good prices. 

And this helps to explain why U.S. inflation has been so high. Unlike in Japan and the euro area, whose central banks spent years striving unsuccessfully to reach their inflation targets, U.S. inflation averaged a more normal pace – near the Fed’s 2 percent target – in the years before the pandemic hit. And this set up prices in the United States to respond more fully to the shocks hitting the global economy once the pandemic started to ease. Our research indicates that of the 6.5 percent increase in March core consumer prices, about 3.5 percentage points was accounted for by the inflation prevailing in the United States in the years before the pandemic. 

What about the part not explained by pre-pandemic inflation? Much of that is indeed attributable to growing pressures of demand, and, in particular, to the rise in job vacancies from their pre-pandemic level. These vacancies, an indicator of the strength of spending in the U.S. economy, have risen to record levels in recent months and, by our estimates, have contributed 2.5 percentage points to U.S. core inflation.

But not all of that spending owes to Biden’s 2021 American Rescue Plan. Much of it was fueled by the 2020 Cares Act and other pre-Biden COVID relief measures, which put extra dollars into Americans’ bank accounts and financed a surge in consumer purchases once the pandemic eased off. And this release of pent-up demand would hardly have been contained had the Fed started raising rates last November, as some critics contend, rather than this March. It takes time for monetary policy to affect the economy, and an additional .75 percentage point of interest rate hikes starting four months earlier would have done little to cool the economy in the near term.

This is not to say that the American Rescue Plan and earlier pandemic stimulus efforts were not wasteful; they were. And this is not to say that the Fed wasn’t slow to respond to rising inflation; it was. And, finally, this is not to say that our authorities are now handling the situation as well as they could; while the Fed has now caught up to where it should be, the Biden administration should be dismantling the Trump tariffs to boost productivity and lower consumer prices. But the blame game is no substitute for serious consideration of a serious problem.

Steven Kamin is a resident scholar at the American Enterprise Institute (AEI), where he studies international macroeconomic and financial issues.