Navigating Inflation: A Comprehensive Analysis

Economic Policy Brief #61 | By: Arvind Salem| June 06, 2024

Featured Photo: www.techopedia.com

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As people clamor for the Federal Reserve to cut interest rates, the Fed stands firm: mainly due to inflationary pressure. From April 2023 to April 2024, the inflation rate was 3.4%, compared to the average of 2.5% from 1989 to 2019. For the average consumer, prices rose 19.32% between January 2020 and April 2024, particularly in the housing market and the grocery store. Rent and homeownership, along with hotel prices, accounted for two-thirds of the annual rise in “core” inflation, which excludes the more volatile components of inflation such as food and energy. Especially leading up to the election where 75% of Americans say strengthening the economy is their top priority and 72% of adults are very concerned about the price of food and consumer goods.

President Trump is attempting to pin the blame on President Biden, who is arguing that he has actually been vigorously fighting inflation. Biden has pointed to his signature achievement: the Inflation Reduction Act, which was enacted in August of 2022. However, even as Biden admits, the Inflation Reduction Act hasn’t lowered prices in the short term: but is supposed to address structural problems to lower prices in the long run. For example, through tax credits for renewable energy, the Inflation Reduction act is projected to cut electricity rates by as much as 9 percent  and lower gas prices by as much as 13 percent through electric vehicle tax credits.

Analysis:

The approaches to combating inflation differ greatly on both sides of the ideological spectrum. Conservatives, unsurprisingly, favor supply-side methods. The Joint Economic Committee of Republicans favors a prescription of lowering government spending (which they perceive as a driver of inflation), coupled with structural fixes including occupational licensing reform, deregulating  energy and housing, and restoring free trade through the repeal of regulatory barriers and tariffs like the Jones Act and Foreign Dredge Act.

However, all of these prescriptions lower costs, with the assumption that those lower costs would get passed on to consumers as lower prices, thus lowering inflation. Yet, the Progressive Caucus rightly points out that many savings don’t get passed onto consumers but get absorbed as corporate profits. Since the Great Recession, companies enjoyed a 25 percent bump in year-over-year corporate profits, while real wages barely changed. This shows that profits are independent of costs, so the lasting solution will be to regulate profit, rather than helping to lower costs. Additionally, Progressives rightly favor allowing the federal government to negotiate prices with Medicare, which Biden has already begun to do.

The 2024 Presidential Election will largely be a battle on the economy, an area where Biden is winning both in terms of messaging and policy, and an area that Biden should continue to emphasize to draw attention away from his key weaknesses on his age and foreign policy.

Engagement Resources:
  • Committee for a Responsible Federal Budget, The Committee for a Responsible Federal Budget is a nonpartisan, non-profit organization committed to educating the public on issues with significant fiscal policy impact. Readers that agree with supply-side attitudes and fiscal responsibility may be interested in this organization.
  • Roosevelt Institute, The Roosevelt Institute is a progressive think tank that supports progressive policies and analysis on a variety of economic problems, including inflation. Readers interested in exploring the progressive perspective on this issue more may be interested in this organization.

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