President Joe Biden and former President Donald Trump participate in the CNN presidential debate on June 27, 2024 in Atlanta.
Justin Sullivan | Getty Images News | Getty Images
Inflation slowed again in June, further easing pressure on consumers’ wallets.
The U.S. Bureau of Labor Statistics said the consumer price index rose 3% in June 2024 from June 2023, down from the 3.3% annual inflation rate in May report Thursday.
While inflation has not yet fully returned to policymakers’ long-term target of around 2%, it has cooled significantly from around 9% two years ago, the highest level since 1981.
But why did inflation burst out in the first place?
During the first U.S. presidential debate last month, the two candidates – President Joe Biden and former President Donald Trump – blamed each other for inflation-related grievances during the pandemic.
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Trump: ‘He caused inflation’ explain Biden at the June 27 debate. “I gave him a country with no, essentially no inflation,” he added.
Biden countered that inflation was lower during Trump’s term because the economy was “underperforming.”
“He destroyed the economy, absolutely destroyed the economy,” Biden said.
But economists say the causes of inflation are not so clear-cut.
In fact, they say, Biden and Trump are responsible for much of the inflation consumers have experienced in recent years.
“Neither Trump nor Biden is to blame”
Global events beyond the control of Trump or Biden have wreaked havoc on the supply and demand dynamics of the U.S. economy, driving up prices, economists say.
There are other factors.
For example, the Federal Reserve, which acts independently of the Oval Office, has been slow to curb inflation. Some Biden and Trump policies, such as pandemic relief packages, may also have played a role, as may so-called greedy inflation.
“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 Brussels Institute, a left-leaning think tank.
“By and large, presidents get more credit and more blame for the economy than they deserve,” he said.
Economists say Biden is seen as fueling high inflation, partly for superficial reasons: He took office in early 2021, a time when inflation was surging significantly.
Likewise, the Covid-19 pandemic plunged the United States into a deep recession under Trump, driving the consumer price index down to close to zero In the spring of 2020, unemployment surged and consumers cut back on spending.
“In my opinion, neither Trump nor Biden is responsible for the high inflation,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s down to the pandemic and Russia’s war in Ukraine.”
Important reasons for soaring inflation
On June 20, 2022, a terminal at Qingdao Port in Qingdao City, Shandong Province, China.
Wu Shaoyang/VCG via Getty Images
Inflation has many tentacles. From a high level, overheating of inflation is largely a matter of supply and demand mismatch.
The pandemic upended typical dynamics. For one, it disrupts global supply chains.
Labor shortage: Workers absent due to illness. Child care centers are closed, making it difficult for parents to work. Others worry about getting sick at work. Economists say lower immigration also reduces the labor supply.
China Closing factories and cargo ships Unable to uninstall For example, in ports, the supply of goods is reduced.
At the same time, consumers have changed their purchasing patterns.
As they spend more time indoors, they’re buying more physical items, such as living room furniture and desks for home offices — a departure from pre-pandemic norms, when Americans tended to Spend more money on services Examples include dining out, traveling, movies and concerts.
Strong demand as the U.S. economy fully reopens, combined with shortages of goods, has led to higher prices.
There are other relevant factors.
For example, Wessel said, automakers didn’t have enough semiconductor wafers to build cars, while rental car companies sold off their fleets because they didn’t think the recession would be short-lived, which lowered rental prices when the economy rebounded quickly. higher.
Zandi said that as COVID-19 cases hit record highs in 2022 and supply chains were further disrupted, Russia’s war in Ukraine “exacerbated” inflation by pushing up global prices for commodities such as oil and food.
As a result, global inflation reached “the highest levels in decades,” the International Monetary Fund wrote in October 2022.
“We only have to look at the still-high inflation rates in most other developed economies to see that much of this period of inflation is actually related to global trends… rather than specific policy actions by any particular government. (although of course they do play a role),” Stephen Brown, deputy chief economist for North America at Capital Economics, wrote in an email.
The impact of big spending ‘will only become clear in hindsight’
US President Biden delivered a speech on the implementation of the American Rescue Plan in Washington on March 15, 2021.
Eric Baradat | AFP | Getty Images
However, Biden and Trump are not entirely without mistakes: For example, they have approved additional government spending during the pandemic, which has led to inflation, economists say.
For example, the American Rescue Plan— The $1.9 trillion stimulus package signed by Biden in March 2021 – provides $1,400 stimulus checks, increases unemployment benefits and provides families with a larger child tax credit, among other relief measures.
Michael Strain, director of economic policy research at the American Enterprise Institute, a right-leaning think tank, said the policy has resulted in “some good things,” such as a strong job market and low unemployment.
But he said it was larger than the U.S. economy needed at the time, boosting prices by putting more money into consumers’ pockets and stimulating demand.
“I do think President Biden bears some responsibility for the inflation that we’ve experienced over the past few years,” Strain said.
He estimates the American Rescue Plan This will increase the underlying inflation rate by about 2 percentage points. The consumer price index peaked at 9.1% in June 2022, the highest level since 1981.
The Federal Reserve (U.S. central bank) aims to keep long-term inflation at around 2%.
“I think without the American Rescue Plan, the United States would still have inflation,” Strang added. “So I think it’s important not to exaggerate the situation.”
However, Zandi believes the inflationary impact of the ARP is “good” and “desirable,” returning the economy to the Fed’s long-term target inflation rate after a long period of below-average inflation.
Trump also approved two stimulus packages in March 2020 and December 2020, worth approximately $3 trillion.
Wessel said these so-called fiscal policy responses are insurance against a bad economic recovery that could overshoot after years of a sluggish U.S. response to the Great Recession that plunged the country into high unemployment.
He said it may have been the presidents’ fault that the United States introduced too much stimulus, but “only hindsight will tell.”
Economists say Biden and Trump have also enacted other policies that could lead to higher prices.
For example, Trump levy tariffs Biden has left imports of steel, aluminum and several commodities from China largely unchanged. Biden also imposed new import taxes on Chinese goods such as electric vehicles and solar panels.
The Fed and “Greedy Inflation”
On June 15, 2022, Federal Reserve Chairman Powell spoke at a press conference on interest rates, economic and monetary policy actions.
Olivier Doulieri – | AFP | Getty Images
Economists say Fed officials also bear some responsibility for inflation.
Central banks use interest rates to control inflation. increase rates Raising borrowing costs for businesses and consumers, cooling the economy and thus inflation.
Economists say the Federal Reserve has raised interest rates to their highest level in about two decades but was initially slow to do so. It raised interest rates for the first time in March 2022, about a year after inflation began to surge.
Strain said it also waited too long to limit “quantitative easing,” a bond-buying program designed to stimulate economic activity.
“This is a mistake,” Zandi said of the Fed’s policy. “I don’t think anyone would have done it right in this situation, but in hindsight it was a mistake.”
Some observers have also pointed to so-called greedy inflation, in which companies take advantage of claims of high inflation to raise prices beyond needed levels and thus boost profits, as a contributing factor.
Economists say this is unlikely to be the cause of inflation, although it may contribute slightly.
“If something like this happens – and I’m not sure it does – it will be a very small factor in our inflation,” Strain said. He estimated that this dynamic would increase inflation by less than 1 percentage point.
“Companies are always looking for opportunities to raise prices where possible,” Wessel said. “I think they took advantage of the inflationary climate, but I don’t think they caused the inflation.”
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