Democrats lack tools to fight inflation

The author is a senior fellow at Brown University and chief economist at Kroll.

The American Democrats have a problem. They face the mid-term elections in November, when inflation is outpacing wage growth, meaning that living standards are falling. But neither the president nor the political party can do much about it.

Voters can’t help but notice inflation: consumer prices rose 9.1% in June compared to last year. According to morning pollmore than half of voters blame it on the policies of President Joe Biden, who has made the fight against inflation his top economic priority.

Other morning poll shows that a larger percentage of voters believe the president has more control over inflation management; more than the Federal Reserve (whose official mandate includes price stability), Congress, or the big companies.

No wonder the president announced inflation.”the curse of our existence“. There are some fiscal policies that the government could use to curb inflation, but they will only push prices down on margin—signaling more of the merits than the actual impact.

The claim that Biden’s fiscal stimulus in 2021 overheated the economy and drove prices up is not entirely true. A study by the Federal Reserve Bank of San Francisco found that roughly half of the spike in inflation was due to supply-side factors: supply chain issues, China’s Covid lockdowns, and Russia’s war on Ukraine. Only about a third accounted for increased demand. Even if the stimulus kicked up inflation, it is winding down this year. USA is experiencing second largest budget cut in its history, which will cool demand.

But with US gas prices more than 40 percent for the last year and product prices more than 10 percentvoters haven’t noticed yet. Energy prices are responsible for approximately half of the rise in US inflation, but neither president had the tools to bring them down by Election Day. April White House announcement that this will release more than 1 million barrels of oil per day from the Strategic Petroleum Reserve, which has stabilized prices for a while. But the International Energy Agency estimates which replaces only about a third of the supplies lost in the war with Ukraine.

The administration is also urging other manufacturers to increase supplies. Biden sent senior officials to visit Venezuelan leader Nicolas Maduro and is reportedly considering easing sanctions on the country in exchange for oil. Biden then traveled to Saudi Arabia for discussions with Crown Prince Mohammed bin Salman, the day-to-day ruler of the kingdom. He left without a public commitment from Saudi Arabia to increase production.

So far, the world has not signed up to the US administration’s proposed price cuts for Russian oil. While this could help bring down oil prices, it would certainly be leaky. India and China are likely to buy oil at prices slightly above the limit, and OPEC+ will be outraged by price cuts.

More oil should mean lower prices. US producers are starting to ramp up drilling, but the desire of Democrats to increase the number of alternative energy sources limits incentives for investment in carbon assets. One problem with all these efforts is that oil is traded on the world market. Chronic underfunding of fossil fuels and Europe’s withdrawal from Russian energy means that oil prices will rise in years, not months. In addition, many refineries were mothballed when demand dropped during the Covid lockdown. The lack of capacity means gasoline prices will remain high even as oil prices decline.

Congress could vote to raise the income tax, hitting demand, but it’s a political failure. Instead, he’s considering suspending the federal tax on gasoline—it’s about 18 cents a gallon, which is small compared to the average price per gallon of about $4.50. Drivers will not receive all the benefits, as energy companies pay part of the tax. Gasoline tax cuts also generate higher demandpushing prices up.

Biden waived environmental regulations by allowing ethanol to be added to gasoline during the summer driving season. But only 2,300 gas stations across the country offer this mixture. Agricultural analysts fear that increased demand for corn for ethanol production could push farmers away from wheat, fueling food inflation.

Beyond oil and gas, the Biden administration wants to crack down on price gouging by firms in industries that lack competitiveness. White House analysis, for example, found that high concentration in the meat processing industry drives up prices. BUT interview This year, more than half of voters blame inflation on the lack of competition between companies, but about two-thirds of economists disagree. Market concentration in a number of US industries has been growing for many years without causing inflation to accelerate.

Biden may cut tariffs. According to Peterson Institute study, removing Trump’s tariffs on $360 billion of Chinese imports could reduce consumer price inflation by 1 percentage point. It may not be worth giving China leverage in trade negotiations. Wider 2 percentage point tariff equivalent reduction could lower the CPI by 1.3 percentage points. However, the impact will be mainly on commodities, not where inflation hits hardest – fuel, food and housing.

This makes Biden’s first remark in his inflation control plan The most effective move for the Democrats is to leave the Fed to fight inflation. This will take time, and there is a risk that the Fed will trigger a vote-killing recession. However, if lowering inflation is the top priority, this is the only thing that is guaranteed to work.