Inflation has emerged as the top issue in the mid-term elections this year. Which begs the question of what Members of Congress can do to quell sharply higher prices at home, when they are spoking globally.
Inflation occurs when demand exceeds supply, creating a cycle of higher prices and demands for pay increases. Theoretically, inflation abates when demand and supply approaches equilibrium. That theory can be jarred by disruptive events such as a pandemic or a war, especially a war involving major fossil fuel and grain exporters.
Fed Chair Jerome Powell’s job is to balance fighting inflation while not sucking the air out of what could be called a booming economy with continuing job growth, wage gains and strong consumer demand.
Economists identify three basic ways to curb inflation – higher interest rates, reduce the supply of money and wage and price controls. The Federal Reserve System sets interest rates and monetary policy. Wage and price controls require congressional authority. However, based on wage and price controls during the Nixon administration that led to recession and job loss, no mainstream politician in either political party has championed them since then. The Fed has begun inching up interest rates, which has rattled a volatile stock market.
Thus, it’s no surprise candidates deplore inflation, but demur on offering any solutions.
The coronavirus-induced global economic lockdown is blamed for drying up consumer demand, business closures and job layoffs. Over time, consumer demand rebounded faster than business production resumed. Supply chain bottlenecks, truck driver shortages and uneven economic recovery have contributed to demand-supply imbalance. Russia’s invasion of Ukraine, which triggered economic sanctions and disrupted supplies of fossil fuels and wheat, haven’t helped. Neither has China’s coronavirus policy of locking down entire cities, including most recently Shanghai, that interrupts production of goods.
Gas Price Inflation
No commodity illustrates the politics of inflation better than gas prices. They are inescapably posted on billboard-sized signs, reflected on paper receipts after fill-ups and serve as reminders when credit card bills come due. Not surprisingly, gas prices attract the most political attention.
Republicans blame President Biden’s environmental policies for blocking the Keystone XL pipeline, postponing new oil and gas leases on federal lands and pushing for a shift to renewable energy, including all-electric vehicles. Democrats blame oil companies for a sluggish return to pre-pandemic production levels and profiteering off higher gas prices. Biden has ordered the release of 1 million barrels of oil per day for 180 days from the Strategic Petroleum Reserve in the hope of easing gas prices at the pump.
As Biden has pointed out, there are existing oil and gas leases that haven’t been tapped and shifting to electric vehicles over the next decade will reduce future demand for gas. Oil companies point out production facilities aren’t like faucets that can be turned off and on and say increasing production levels requires retrieving workers who were let go during the pandemic and found other jobs. The largest release from the Strategic Petroleum Reserve in history ordered by Biden only represents 5 percent of American demand and 1 percent of global demand and therefore will have minimal market impact.
OPEC oil producers have declined to boost production, at least in the short term. Disruptions in normal oil and gas exports from Russia have aggravated global shortages and contributed to higher oil prices. American gas prices at the pump remain sharply lower than Europeans pay.
American voters want political leaders to do something to lower gas prices. For better or worse, politicians mostly produce steamy rhetoric, spew partisan talking points and cast blame because that’s about all they can do, other than show sympathy for the ill effects of inflation.
High Drug Prices
Drug prices run a close second to gas prices as an inflationary bugaboo. The main difference is that drug prices were too high, according to critics, before the pandemic and remain high. Blame is heaped on drug makers, health insurers and middlemen like pharmacy benefit managers. Congress is working on a bipartisan compromise to cap the price of insulin for Medicare beneficiaries and possibly diabetic patients without health insurance. Critics warn that capping the price for one prescription drug could result in higher prices for other drugs. Pharmaceutical companies say cutting into their profits will decrease their ability to invest in new drug research. It’s unlikely Congress will pass comprehensive drug pricing legislation.
The action that matters is at the Fed. After an extended period of pumping money into the economy and holding interest rates to near zero, the Fed is beginning to reverse course, has sold off bonds it bought and has authorized the first in a promised series of interest rate hikes this year. The Fed’s preferred inflation rate is 2 percent. The current inflation rate exceeds 7 percent and is much higher on some goods.
The Fed’s role extends beyond holding down inflation. It also involves supporting American jobs and job growth. Despite inflation – or perhaps as a reflection of inflation, US job growth continues to exceed 400,000 per month. US employment is approaching what it was before pandemic lockdowns. Employers continue to have difficulty filling positions despite offers of higher wages, benefits and bonuses, and there are still American workers, many of them women, who haven’t yet returned to the workforce.
Fed Chair Jerome Powell’s job is to balance fighting inflation while not sucking the air out of what could be called a booming economy, which includes notable wage gains negotiated or forced by market factors to recruit workers. The longer-term effects of the Russian invasion, intensifying sanctions and China’s coronavirus policies that close entire cities are huge unknowns with huge potential economic impact.
Oregon Election Ads
Despite polling showing inflation is the top voter concern, political ads in Oregon’s upcoming primary election by candidates running for congressional seats and governor don’t mention inflation, let alone back policies to arrest it. Depending on which party they belong to, political ads instead focus on base-pleasing bromides such as protecting Medicare benefits or blocking future mask mandates.
Nevertheless, a substantial number of voters may adopt the attitude of “throw out the old bastards and elect a new batch of bastards”. For incumbents in safe districts, that may not matter. In tighter races, it might make the difference for challengers, even though they won’t have a cure for inflation either.