Analyzing the Factors Behind Prolonged U.S. Inflation and Assessing Biden’s Impact
U.S. inflation has been a hot topic of discussion recently, with voters expressing their dissatisfaction over high prices. Since President Joe Biden took office, the economy has been recovering from the impact of the COVID-19 pandemic, but inflation has remained stubbornly high, much to the frustration of the American people. However, blaming Biden alone for this issue is unfair and fails to acknowledge the complexities of market dynamics and price determination.
One significant factor contributing to the current inflationary pressures is the breakdown of domestic and global supply chains during the pandemic and early recovery period. Shortages of computer chips and backed-up West Coast ports were just some of the consequences of disrupted supply chains. Lockdowns in China also curtailed imports, leading to a scarcity of components and finished goods. Additionally, with many Americans working from home and service establishments closed, there was a shift in consumer spending towards goods rather than services, further straining limited supplies.
Studies conducted by the U.S. Federal Reserve suggest that approximately half of the price increase can be attributed to these supply constraints, which were not directly influenced by the Biden administration. It is essential to recognize that the pandemic created unique circumstances that affected global trade and disrupted traditional market dynamics.
Furthermore, the U.S. government injected approximately $4.6 trillion into unemployment benefits, aid to states and local governments, and other stimulus spending. This significant expenditure was made possible by the Federal Reserve’s expansion of its balance sheet to monetize a substantial portion of the resulting federal debt. However, contrary to expectations, immediate inflation did not occur due to several reasons.
Firstly, for money to have an impact on prices, it must circulate in the markets for goods and services. However, many Americans chose to save a significant portion of their pandemic-relief checks instead of spending them immediately. Household savings surged above trend by about $2.1 trillion and did not decline significantly until late 2021 and early 2022. Similarly, state and local governments faced challenges in spending the COVID aid as quickly as it arrived. These high levels of savings indicate that the Trump administration’s aid distribution may have been excessive, exceeding the actual needs of households, small businesses, and state and local governments during the shutdown.
Secondly, the classical quantity theory of money suggests that full employment is necessary for increased money supply to lead to higher prices with certainty. However, the pandemic led to a surge in unemployment, with rates reaching 14.8% just two months after the initial outbreak. It took until March 2022 for the labor market to return to pre-COVID levels. Consequently, the delayed effects of money printing on prices only manifested in April 2022, leading to an acceleration of inflation to 9.1% in June.
Responsibility for the current inflationary situation cannot be solely assigned to President Biden. While the Federal Reserve denies culpability and argues that the higher prices are transitory, it is crucial to consider that Fed Chair Jerome Powell delayed action at the Fed. Additionally, it was the Trump administration that administered most of the $4.6 trillion in stimulus, and Biden himself was warned about the potential irresponsibility of the final $1.9 trillion tranche.
The impact of inflation on President Biden’s popularity is evident in recent polls. A significant number of voters disapprove of his handling of inflation, with a 24% margin compared to those who approve. Despite the slowing pace of inflation, it remains a persistent concern for Americans, and this sentiment naturally affects voters’ perception of the incumbent president’s economic management.
It is worth noting that not all economic news is negative under Biden’s presidency. Gasoline prices have fallen considerably since May, which should be acknowledged as a positive outcome. However, human nature tends to focus on the bad news and overlook the positive developments. As humans, we are wired to respond more quickly to threats, which explains why the majority of voters still disapprove of Biden’s handling of the economy, despite robust growth and decreasing unemployment.
In conclusion, analyzing the factors behind prolonged U.S. inflation reveals a complex interplay of supply chain disruptions, excessive stimulus spending, and delayed effects of money printing. Assigning all the blame to President Biden is unfair and fails to consider the broader context. While inflation remains a concern for Americans, it is essential to recognize the challenges faced during the pandemic and the efforts made to stabilize the economy. The situation requires a comprehensive understanding of market dynamics and careful consideration of policy decisions moving forward.
