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Inflation Is Now a Political Problem in America – Here Are the White House’s Levers To Calm Inflation
The situation will become urgent for Joe Biden in 2022.
Inflation reached 6.2% in America in October 2021. A first since 1990!
While Jerome Powell has been denying the reality of this high inflation in America for several months, it is now becoming a political problem that Joe Biden will have to address. The White House has several levers of action with different time horizons and no guarantee of success.
Here are the main ones.
Influencing energy prices
At $3.40 per gallon, U.S. gasoline prices have risen 35% from early 2020, according to figures from the U.S. Energy Information Administration (EIA). In the short term, the only lever that can have an impact on inflation is energy prices. The White House could play on the strategic reserves and force the companies in the sector to calm down under the threat of investigations.
A few days ago, the White House made public a letter addressed to the FTC, the competition regulator, to put pressure on the oil groups. In the absence of being able to influence OPEC(Organization of the Petroleum Exporting Countries)'s decisions, some are also anticipating a drop in strategic petroleum reserves (SPR).
To ease prices, the Biden administration could also relax the obligation to include green fuels in refined products, but the measure would not be well received by farmers, who use it as an outlet. American shale oil producers could also theoretically produce more. However, many of them are heavily indebted and have made profitability their priority, limiting investment in new wells. These measures would also be incompatible with the Biden administration's stated objective of fighting CO2 emissions.
More control over companies
Since the summer of 2021, the White House has been engaged in a vast project to restore competition to the American economy. An executive order strengthens the powers of federal agencies to control corporate behavior in several priority sectors, including Internet service providers, health care, and agriculture.
The Biden administration also wants to promote competition in financial services, in particular by ensuring that consumers can port their data. It also plans to increase control over company takeovers, to limit the concentration of players. These are all measures that could ease prices, but only in the medium term.
Joe Biden has upheld Donald Trump's tariffs on Chinese goods. U.S. taxes on Chinese exports thus reach 19.3%, when they were only 3.1% in 2018, according to data from the Peterson Institute. And the scope is wide, with two-thirds of Chinese exports subject to U.S. tariffs when they only applied to the thickness of the line three years ago.
However, reducing them was not on the agenda of the discussions between Joe Biden and Xi Jinping during their virtual summit in mid-November 2021. The political stakes are broader than just controlling American prices. Moreover, for industrial inputs, it would take time for this to be reflected in prices, and the impact would not necessarily be visible on the goods that people pay attention to.
Only an opening on certain products was made by Trade Representative Katherine Tai, with possible exemptions.
Discussing monetary policy
If the Fed is independent in theory, in practice, it is subject to multiple pressures from the administrations in place in the White House. Thus, economists are fuelling the debate on US monetary policy by putting pressure on the US central bank.
In a note for the Peterson Institute, former IMF chief economist Olivier Blanchard today calls for his project on the upcoming debate:
“The financial markets seem completely relaxed, with 5-year real interest rates near -2%. I don't think they should be. The lessons of history we should be looking at now are the episodes of disinflation.”
The most famous one dates back to the end of the 1970s when former Fed boss Paul Volcker calmed down galloping inflation, but at the cost of a recession. For Olivier Blanchard, the reflection to be had concerns the effects of a sudden and largely unforeseen rise in rates:
“How would a sharp and largely unanticipated rate hike affect not only the economy, but also the financial system and the outlook for emerging markets? That's what we need to think about.”
He is not the only economist to call for a less expansionary monetary policy from the Fed, while the latter has just started its tapering at a very reduced pace.
Joe Biden can pull several levers to try to calm inflation in America and preserve his political chances in the crucial year 2022 for him since it ends with the Midterms. A Senate loss would be politically catastrophic for the Democrats.
We will have to watch carefully the levers that Joe Biden will decide to pull, and above all, observe in the coming months the effects that this will have on inflation in America.
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