A spectre is haunting Washington – the spectre of inflation.
Inflation marred the presidency of Richard Nixon, it ruined the presidencies of Gerald Ford and Jimmy Carter – and now it may be rearing its ugly head amid the presidency of Joe Biden.
The United States is still enjoying an economic boom, but annualized inflation hit 5.4 per cent in June. That is almost four times the rate for the pandemic calendar year of 2020 and far higher than Canada’s annualized rate of 3.6 per cent reported in May. In June alone, U.S. prices rose 0.9 per cent on a seasonally adjusted basis, the largest one-month change in more than a dozen years, enough to give rise to fears of the kind of double-digit inflation that roiled the economy a generation ago.
Inflation is a normal, sometimes welcome, element of the economy – as long as it is low and predictable. It can be a boon to debtors, who can repay loans with dollars that are less valuable than the ones they borrowed – until lenders catch on and demand higher interest rates to compensate for the higher inflation they expect. In the past two decades, U.S. inflation has rested comfortably between 2 per cent and 4 per cent, and expectations have been fairly stable.
That was then. Now, according to the Bureau of Labor Statistics, the price of used cars and trucks increased 10.5 per cent and the food price index doubled in June. Remove energy (which rose 24.5 per cent in the past year) and food (which rose 2.4 per cent) from the calculation, and inflation still climbed 4.5 per cent over the past 12 months – the highest rate since 1991, when George H.W. Bush was president. Mr. Bush had several triumphs in foreign policy, but it was the economic distress coursing through the economy that allowed Governor Bill Clinton of Arkansas to capture the White House a year later.
Now Mr. Biden, presiding over widespread prosperity, is proposing trillion-dollar infrastructure and general spending bills that will flood the country with cash, perhaps giving grounds to inflation fears but surely providing justifiable elements to Republican attacks on the Biden administration’s economic policies and its spending priorities.
This month, the National Republican Congressional Committee produced an ad aimed at 11 vulnerable Democratic members of the House of Representatives, arguing that their rivals’ “harmful economic policies are making everyday goods cost more.” The committee cited higher prices for “burgers, buns, propane and gas.” Earlier this week, House Minority Leader Kevin McCarthy of California distributed a letter to his Republican colleagues saying, “Americans are now paying more for things they and their families need than they have in the past 13 years,” adding, “We know inflation is hitting hard-working middle-class families the hardest.”
Democrats responded by citing the recovery in labour markets and rising consumer confidence. They argue that these inflation bursts are temporary bumps in an otherwise improving economic road. Senate Majority Leader Chuck Schumer of New York argued Wednesday that the Democrats’ infrastructure initiative actually would stanch inflation, not compound it.
Mark Sniderman, a former executive vice-president and chief policy officer of the Federal Reserve Bank of Cleveland who teaches economics at Case Western Reserve University, believes that part of inflation’s growth can be attributed to the economy returning to its normal state after a pandemic year.
Right now the Federal Reserve’s Federal Open Market Committee, which manages interest-rate adjustments to regulate the pace of the economy, has indicated that rates will stay low at least until the labour markets fully recover. The Fed has stated a willingness to allow inflation to drift above its longer-term 2-per-cent target, at least for a while. That’s because inflation had for a long time run below target, suggesting the Fed’s monetary policy had been too restrictive. The board wants to avoid making that mistake now.
But the mere presence of the term “inflation” in the U.S. political conversation is a sobering reminder of the damage it caused from the end of the 1960s through the next decade. Mr. Ford wrestled inflation with policy tweaks and publicity stunts – he wore a “WIN” button, which stood for “Whip Inflation Now” – to under 5 per cent but was still tarred by the view that the economy was weak.
“In the public mind he was the victim of inflation perceptions because we were conditioned to expect prices to go up,” said historian Richard Norton Smith, a former director of the Gerald R. Ford Museum and Library who is finishing a biography of the 38th president. “He kept saying – he convinced himself – that inflation was ‘Enemy No. 1.’ He thought it was the root of all evil, and even though he made demonstrable progress, it became the root of what people thought of his presidency.”
But inflation reached 14 per cent in 1980 and, along with Mr. Carter’s failure to secure the release of U.S. diplomats held hostage in Iran, accounted for the election of Ronald Reagan.
“The Great Inflation was the defining macroeconomic event of the second half of the twentieth century,” Michael Bryan, vice-president and senior economist in the research department of the Federal Reserve Bank of Atlanta, wrote for the Fed’s history project. “Over the nearly two decades it lasted, the global monetary system established during World War II was abandoned, there were four economic recessions, two severe energy shortages, and the unprecedented peacetime implementation of wage and price controls.”
Mr. Sniderman, the former Fed official, believes the fears are real – but perhaps a bit overstated.
“I take it seriously, and I believe the Fed is taking it seriously,” he said. “People are nervous because they don’t know how much the Fed is willing to tolerate – and how long they are willing to tolerate it.”
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