Biden aims to do what presidents often can’t: beat inflation
Washington – LBJ tried to unwind. Richard Nixon issued a presidential decree. The Ford administration has printed buttons urging Americans to “hit inflation now”.
Over the years, American presidents have tried, and often faltered, in their efforts to suppress the economic and political threat of consumer inflation.
Now, President Joe Biden is giving it a chance.
In the face of soaring gasoline and other consumer prices that are baffling American households, Biden on Tuesday ordered the release of 50 million barrels of oil from the US Strategic Petroleum Reserve. The move, carried out in coordination with several other major countries, aims to contain energy costs. After anticipating this move, the oil markets were not affected by the details: Oil prices actually rose on the news.
It was only the latest step Biden took to show that he was doing everything he could to combat inflation, as gasoline and food prices, in particular, placed an increasing burden on American households. On Monday, he announced that he would reappoint Jerome Powell as Federal Reserve Chairman, a move partly aimed at reassuring financial markets that Washington is serious about containing consumer prices. Last month, he announced a deal to ease the supply backlog at the Port of Los Angeles by extending operations there to 24 hours a day, seven days a week.
None of the president’s actions, however, are likely to have a tangible impact on the price hike any time soon.
“I don’t think the president has much of a tool to pull out to bring down the inflation rate anytime soon,” said Mark Zandi, chief economist at Moody’s Analytics. “The things he does are positive, have no downside… but they are on the sidelines. They won’t move the dial much.”
Inflation is always a strong opponent, and is further complicated by the unusual recovery from a pandemic recession, with shortages of supplies, workers and shipping bottlenecks driving up prices.
What happens to consumer prices?
The government’s consumer price index jumped 6.2% in the 12 months ending in October — the biggest jump since 1990.
After nearly four decades of more or less stable prices, CPI news represents “a once-in-a-generation spike in inflation,” said Sarah Bender, a George Washington University political science professor who studies the Federal Reserve. The problem is stark because it is something that voters notice. It’s hard to escape the impact of high inflation on your daily life, whether it’s buying milk or buying gas.”
The average price of regular gasoline has risen to $3.40 a gallon from $2.11 a year ago, according to the AAA.
Compounding the pain and increasing pressure on Biden, inflation is outstripping Americans’ income. Adjusted for price increases, average hourly wages actually fell 1.2% last month compared to a year earlier.
“Inflation hurts, and it’s always political,” said Diane Sonk, chief economist at accounting and consulting firm Grant Thornton.
What is behind the high price?
It’s partly the result of the very good news. The global economy – and particularly the US economy – has rebounded with unexpected speed and strength from last year’s short but severe recession. It was the result of extremely low interest rates, massive government spending and, ultimately, the widespread availability of vaccines that allowed more of the economy to reopen.
The speed of the recovery surprised companies. A year and a half ago, they were preparing for the worst – laying off workers, leaving shelves and warehouses bare, reducing investment and factory production.
Energy companies have done the same: They cut oil and gas production as demand for transportation fuels plummeted. Once the order came back roaring, they weren’t ready. They found themselves scrambling to call in workers and buy enough to meet customers’ orders. Ports and freight yards cannot handle the traffic. Countries competed for boatloads of expensive liquid natural gas. The cyclical COVID-19 outbreak has shut down Asian ports and factories. Global supply chains have collapsed.
As costs rise, many companies have found that they can pass the burden on to consumers in the form of higher prices. Meanwhile, many families cashed their government relief checks and pooled their savings. Some critics also blamed Biden’s $1.9 trillion emergency aid package for boosting economic activity and contributing to inflation pressures.
Economists are divided over how long inflation will last. Jos Foucher, chief economist at PNC Financial, predicts that inflationary pressures will ease as supply chains sort themselves out.
“I expect to see inflation slow down in 2022,” he said.
What can chiefs do?
The White House has limited tools to reverse price hikes. That job is more up to the Federal Reserve, which can raise borrowing costs to calm the faltering economy. During the 1960s and 1970s, presidents increasingly felt pressure to do something about inflation as it became a serious political threat.
President Lyndon Johnson has tried to persuade companies to abandon price increases and labor unions to reduce wage demands – a practice known as “jawboning”. When Bethlehem Steel raised steel prices in 1965, Johnson criticized its executives as unpatriotic and backed down, according to Robert Samuelson’s book, The Great Inflation and Its Consequences. When egg prices soared in 1966, Johnson ordered the US Surgeon General to highlight the health risks of cholesterol in eggs, with the intent of reducing egg sales and thus lowering prices.
Nixon imposed wage and price controls in 1971 and 1973, stifling inflation for a brief period, only to see prices rise once the controls were lifted.
Gerald Ford’s “Whip Inflation Now” program encouraged Americans to grow their own vegetables, waste less food and consume less. Americans mostly responded by mocking the program. Some wore the president’s WIN buttons upside down, stating that the resulting NIM represented “no instant miracles”.
What did Biden do?
Biden last week signed into law a trillion-dollar public works program that pours money into repairing roads, bridges and ports, potentially easing a supply chain backlog that has contributed to price hikes. Solving shipping bottlenecks would be doubly beneficial: it would ease inflationary pressures and boost the economy by increasing the flow of goods to customers.
Last week, Biden sent a letter to the Federal Trade Commission asking the FTC chair to consider investigating whether high gasoline prices were the result of “unlawful behaviour.” The White House is also ramping up antitrust enforcement in the meatpacking industry, seeking to increase competition and lower meat prices.
His decision to rename Powell to lead the Fed was partly intended to reassure financial markets of Washington’s determination to prevent consumer prices from spiraling out of control. Another potential contender for the position – Lyle Brainard, a member of the Federal Reserve Board of Governors – was seen as less hawkish on inflation.
Why did Biden rely on the Strategic Petroleum Reserve Tuesday?
The idea was that by putting more oil on the market, prices would fall. This did not happen. But depending on what happens in the rest of the world, there is still a chance that it will work.
US petroleum reserves hold about 605 million barrels of oil in underground caverns in Texas and Louisiana. It was designed in the 1970s in response to the Arab oil embargo to store oil in the event of a supply disruption or emergency. But the dynamics of the global oil industry has changed dramatically in recent years, and now the United States exports more oil than it imports.
The 50 million barrels that Biden promised to release are likely to be sold slowly, at a rate of about 1 million barrels per day, which means the new flow of oil could last about two months. Jim Burkhard of IHS Markit said adding even a small amount of oil to the market could lead to a surplus, possibly lowering the price.
“The immediate price reaction is not the final verdict on the effectiveness of this effort,” he added. “It really will be in the coming months.”
Bussewitz reported from New York.
Associated Press economics writer Martin Krusinger contributed to this report.
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