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CPI Moderation and Recent Trends

The consumer price index (CPI) moderated again in June 2024, as reported by the Bureau of Labor Statistics on Thursday. The CPI annual inflation rate has declined to 3% from its 9.1% pandemic-era peak in 2022. Economists suggest that neither President Joe Biden nor former President Donald Trump should shoulder much of the blame for high inflation. Inflation decelerated again in June, providing further relief to consumers' wallets. The CPI rose 3% in June 2024 from June 2023, down from a 3.3% annual inflation rate in May. Although inflation is not yet back to the long-term target of around 2%, it has significantly cooled from about 9% two years ago, the highest level since 1981.

Causes of Initial Inflation Surge

The first U.S. presidential debate last month saw both candidates blame each other for inflation-related issues during the pandemic era. Trump accused Biden of causing inflation, claiming he left the country with almost no inflation. Biden countered, stating that inflation was low during Trump's term because the economy was "flat on its back." Economists, however, argue that the cause of inflation isn't so black and white. They believe that neither Trump nor Biden is primarily responsible for the high inflation experienced in recent years. Global events beyond their control disrupted supply and demand dynamics, fueling higher prices. The Federal Reserve, acting independently, was slow to contain hot inflation, and both Biden and Trump's pandemic relief policies likely played a role.

Global Events and Economic Policies

David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, noted that presidents often get more credit and blame for the economy than they deserve. Biden's perceived role in stoking high inflation is partly due to the timing of his presidency, which began in early 2021 when inflation spiked. Similarly, the COVID-19 pandemic led to a severe recession during Trump's tenure, reducing the CPI to near zero in spring 2020. Mark Zandi, chief economist at Moody's Analytics, stated that the pandemic and the Russian war in Ukraine were significant factors in high inflation.

Supply and Demand Mismatches

Inflation is largely an issue of mismatched supply and demand. The pandemic disrupted global supply chains and caused labor shortages, as illness sidelined workers and child-care centers closed. Consumers also changed their buying patterns, purchasing more physical goods rather than services. This shift in demand, combined with goods shortages, fueled higher prices. Additional factors included automakers lacking semiconductor chips, rental car companies selling off fleets, and disrupted supply chains due to record-high COVID cases and Russia's war in Ukraine.

Labor Market Dynamics

The labor market was significantly affected by the pandemic, leading to inflationary pressures. With illness sidelining workers, many industries faced labor shortages. Child-care center closures made it challenging for parents to return to work, and fears of getting sick on the job further reduced the available workforce. A decline in immigration also played a role, limiting the supply of workers in various sectors. These labor shortages contributed to higher wages as businesses competed for a smaller pool of workers, which in turn drove up costs and prices across the economy.

Fiscal Policy Responses

Economists acknowledge that both Biden and Trump greenlit government spending that contributed to inflation. Biden's American Rescue Plan (ARP), a $1.9 trillion stimulus package, included $1,400 stimulus checks, enhanced unemployment benefits, and a larger child tax credit. While this policy led to a strong job market and low unemployment, it also raised prices by increasing consumer demand. Michael Strain from the American Enterprise Institute estimated that the ARP added about 2 percentage points to underlying inflation. However, Zandi viewed the ARP's inflationary impact as desirable, helping bring the economy back to the Fed's long-term target after a period of below-average inflation. Trump had also authorized stimulus packages worth about $3 trillion in 2020. These fiscal policy responses, though potentially excessive, were seen as necessary to prevent a sluggish economic recovery.

Monetary Policy and Corporate Behavior

The Federal Reserve also played a role in inflation. The central bank, which uses interest rates to control inflation, was initially slow to raise rates, only starting in March 2022, about a year after inflation began to spike. The Fed's delayed response and prolonged quantitative easing were considered mistakes. Some observers have pointed to "greedflation," where corporations took advantage of the high-inflation narrative to raise prices excessively, boosting profits. While this may have contributed slightly, economists believe it was not a primary cause of inflation. Companies often seek opportunities to raise prices when possible, but this was likely a minor factor in the overall inflation rate.

Supply Chain Disruptions

The pandemic's impact on global supply chains was profound. Factories in China and other major manufacturing hubs were shut down, reducing the supply of goods worldwide. Ports experienced significant backlogs, with cargo ships unable to unload their goods, further straining supply lines. These disruptions led to shortages of various products, from electronics to household items, exacerbating inflation as demand outstripped supply. As the economy reopened, the surge in demand for goods that were in short supply pushed prices higher.

Changes in Consumer Behavior

Consumer behavior shifted dramatically during the pandemic, contributing to inflationary pressures. With people spending more time at home, there was a significant increase in demand for home office equipment, furniture, and other household goods. This shift away from spending on services like dining out, travel, and entertainment towards physical goods placed additional strain on supply chains. The increased demand for goods, coupled with supply shortages, created a perfect storm for rising prices.

Energy and Commodity Prices

Energy and commodity prices also played a crucial role in driving inflation. The Russian invasion of Ukraine in early 2022 led to significant disruptions in global energy markets, with oil and gas prices spiking due to supply concerns. These higher energy costs fed into the broader economy, raising production and transportation costs for businesses. Additionally, the war impacted global food supplies, particularly grains, as Ukraine is a major exporter of wheat. The resulting increase in food prices further fueled overall inflation.

Policy Implications and Future Outlook

Looking ahead, policymakers face the challenge of balancing economic growth with inflation control. The Federal Reserve's interest rate hikes aim to cool the economy and bring inflation back to its target rate. However, there are concerns about the potential impact on economic growth and employment. The balance between stimulating the economy and preventing overheating will be critical in the coming years. The experiences of the past few years highlight the complexity of managing inflation in a globalized economy with interconnected supply chains and varying consumer behaviors.

Conclusion

The moderation of the CPI in June 2024 reflects a significant cooling of inflation from its pandemic-era peak. Economists argue that the high inflation experienced in recent years was primarily due to global events and supply and demand mismatches rather than the specific policies of Biden or Trump. While both presidents' fiscal policies contributed to inflation, these measures were often necessary responses to the unprecedented economic challenges posed by the pandemic. The Federal Reserve's slow response and corporate pricing behaviors also played roles, but the overall picture of inflation is complex, involving multiple factors beyond the control of any single administration. As policymakers navigate the future, the lessons learned from this period will be crucial in shaping effective economic strategies that promote stability and growth.