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US Inflation at Highest Rate Since 1990


At the start of Joe Biden’s presidency, his main economic aim was to revive the US’ post-pandemic economy back to its pre-pandemic levels. He did this by increasing aggregate demand in the economy through fiscal stimulus. However, the main issue for the White House has now shifted to combatting record levels of inflation.


The US economy’s recovery has been steady. October seemed like a success in terms of a higher than expected rise in jobs in the US. Economists projected 450,000 jobs to be added but there were 531,000 in the end. This has brought unemployment down to 4.6%, a drop from 4.9% in September and 5.9% in July. Biden credited his stimulus plan for this success. However, steep price rises are threatening to undermine the economic recovery.


Inflation is at 6.2%, the highest annual rate since 1990. The monthly price rise has been 0.9%, higher than the average 0.6%. High inflation negatively impacts consumers as their real incomes are reduced. This means that their purchasing power goes down which allows them to buy less for the same income. Inflation can be especially damaging to lower-skilled, low-earning people as they are less able to negotiate a higher wage to match the price rises, leading to higher inequality. Inflation can also lead to business confidence going down leading to firms employing fewer people due to fears of cost rises in the near future, therefore economic growth slows.


The issue of inflation is caused by a range of different factors and the Biden administration has looked to address each of these. One factor is the supply-chain bottlenecks caused by the shock to the global economy by Covid-19. This has caused a reduction of supply of goods to consumers creating excess demand which leads to some demand-pull inflation. The US president has spoken to major retailers (such as Walmart and Target) to try and find a solution to dampen price rises.


The rise in oil prices has also been a major contributor. This follows the OPEC+ members’ decision to reduce the production of oil, leading to a rise in the price. This has created higher costs to firms globally, including in the US. President Biden has asked these countries, such as Saudi Arabia, to start exporting more oil so that prices are lowered but this has been ignored, even as the US hinted at threats. Biden is now considering whether to release some oil from the US Strategic Petroleum Reserve (left for emergencies) to increase supply. This, as well as other cost rises, has caused more cost-push inflation, which is trickier to solve as it involves wages rising as workers demand higher salaries so that their real wages stay constant, leading to firms passing on the extra cost to consumers in terms of higher prices and this ends up being a continuous cycle.


The Biden administration has shown little results leading to many fearing that they won’t be able to solve this crisis.


The Federal Reserve has also started taking action by reducing its large-scale asset purchase programme which was being used as a $120 billion-a-month stimulus for the economy. The stimulus programme is set to end in June at the current rate, with higher interest rates being imposed then. Some have even criticized the Fed for not taking enough action to combat inflation already, claiming that they produced a massive amount of extra money leading to ‘too much money chasing too few goods. It could be argued that their inaction could lead to tougher contractionary measures later on which significantly slow economic growth.


The adverse effects of inflation are causing major problems for Joe Biden politically. Firstly, his popularity is fading as consumers are faced with these issues and this may significantly affect the Democrat’s chances at next year’s midterm elections. Secondly, his proposed $1.75 trillion spending agenda, which includes money for social spending and the climate bill, is facing fierce criticism from Republicans and even some Democrats as they claim that such a large injection into the economy will inevitably lead to further price rises as aggregate demand rises. However, the Biden administration insists that this bill will aid ease the costs of inflation by reducing housing, childcare and education costs for many families.


Some argue that these supply and demand constraints will ease over time and the issues of inflation lead on to the following years. However, the White House has said that they will be actively trying to solve the issue.

 

Written by Florian Mihindukulasuriya Thiserage

Research compiled by Hugo Denage

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