Listening to Republicans — and much of the mainstream media — one might think inflation is all President Biden’s doing and the result of the $1.9 trillion American Rescue Plan. It’s possible to argue the package should have been smaller (at the risk of persistently higher unemployment), but one stimulus plan is not the primary driver of inflation.
A recent Pew Research report puts the inflation problem in perspective: “Besides Israel, other countries with very large increases in inflation between 2020 and 2022 include Italy, which saw a nearly twentyfold increase in the first quarter of 2022 compared with two years earlier (from 0.29% to 5.67%); Switzerland, which went from ‑0.13% in the first quarter of 2020 to 2.06% in the same period of this year; and Greece,” where inflation “reached 7.44% in this year’s first quarter — nearly 21 times what it was two years earlier (0.36%).”
In fact, U.S. inflation is nowhere near the worst in the world. Pew reports: “Annual U.S. inflation in the first quarter of this year averaged just below 8.0% — the 13th-highest rate among the 44 countries examined. The first-quarter inflation rate in the U.S. was almost four times its level in 2020’s first quarter.”
Biden is right when he notes that inflation has many drivers, including the complete shutdown of the economy and its reopening being followed by pent-up demand chasing too little supply as producers struggled to get up and running. The rise in gas prices also shouldn’t be underestimated. CNN reports, “Energy prices rose 34.6% compared to a year ago, driven by a nearly 50% jump in gas prices over the last year. AAA’s tracking of gas prices shows the price of a gallon of regular gas nationwide is now at $4.99, after setting records in 31 of the last 32 days. The June CPI report due next month is certain to show another big jump in gas prices.” These factors have affected all advanced economies to some degree.
That is of little solace to U.S. consumers, which is why Biden is compelled to take flashy actions of marginal utility. Biden’s letter to oil companies on Wednesday calling on them to cut costs underscores the economic and political impact of gas prices. But while Biden railed at “refinery profit margins well above normal” and “historically high refinery profit margins,” attacks on corporate greed are unlikely to bring relief. It’s a supply and demand problem with no immediate fix.
As the Associated Press explained, “Some refineries that produce gasoline, jet fuel, diesel and other petroleum products shut down during the first year of the pandemic, when demand collapsed. While a few are expected to boost capacity in the next year or so, others are reluctant to invest in new facilities because the transition to electric vehicles will reduce demand for gasoline over the long run.” American producers are also wary about adding to supply because they expect prices to eventually drop.
That leaves two disagreeable options: Imploring Saudi Arabia (whose “pariah” status is unsustainable) to increase its supply, and reducing demand by driving less. Absent those changes, gas prices are not going to come down. While the price spike is the most vivid example of the need to shift to clean energy, that long-term objective will not affect energy prices in the near term.
Biden and U.S. consumers must therefore rely on the traditional brake on inflation: the Federal Reserve, which took an extraordinary step on Wednesday of raising interest rates by three-quarters of a percentage point. Even that, Fed Chair Jerome H. Powell conceded, might not bring about price stability given factors outside the Fed’s control, including increasing prices for oil and other commodities.
Biden is left trying to address inflation at the margins. Reducing tariffs may lower some consumer costs. Increased production (e.g., new chip manufacturing) may help as well. But the realistic answer is that no one factor got us to this point, and assuming the president has the power to stop inflation with a snap of his fingers is the stuff of fantasies — and, sadly for Democrats, of political attack ads.