Inflation Haunts the Biden Economy
An historic policy failure calls for a sharp turn at the Fed and White House.
By The Editorial Board
So how’s the U.S. government’s grand experiment in modern monetary theory turning out?
Not well.
Consumer prices over the past 12 months rose 7.5%—the most in 40 years—while real wages declined 1.7%, the Bureau of Labor Statistics reported Thursday.
The report jolted financial markets, as stocks fell and bond yields rose. But nothing in the January report should be shocking.
This is what happens when the government massively expands the money supply and over-stimulates demand.
Yet the Federal Reserve and Biden Administration last year dismissed inflation as “transitory.”
They have belatedly dropped that line, but they still won’t concede that inflation is becoming more entrenched as price increases have exceeded 5% for eight months in a row.
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Food prices increased 0.9% in January and 7% over the year.
Gas prices ticked down 0.8% last month but are still up a whopping 40% from a year ago.
It’s striking that the core index that excludes food and energy rose 0.6% in January—about twice as much as last summer—and is up 6% year-over-year.
The White House points out that used car prices are moderating, but this is small consolation since rising prices for other goods and services are more than compensating.
Clothing prices were relatively flat for most of the pandemic as people stayed home, but they rose 1.1% last month and are up 5.3% year-over-year.
Airline fares climbed 2.3% in January even amid the Omicron surge.
Fed oracles predicted prices would ease for goods that were in high demand during lockdowns.
That didn’t happen.
They also forecast that the inflation rate would decline as consumption shifted to services.
That also hasn’t happened.
Americans are consuming more services, which has pushed up prices for travel, medical care and dry cleaning—the service index was up 4.6% from a year ago.
The economy needed support early in the pandemic.
But Congress’s $900 billion Covid relief bill in December 2020 and the $1.9 trillion in spending that Democrats passed last March were overkill.
The enormous income transfers reduced incentives to work while at the same time giving people more money to spend.
The Fed has helped mop up Congress’s spending with bond buying, doubling its balance sheet to an astonishing $8.9 trillion.
Its monthly purchases of Treasurys and mortgage-backed securities were intended to reduce long-term interest rates, increase asset prices and create a wealth effect that stimulated consumption.
You might say it over-achieved.
Housing prices have risen nearly 25%, and the Dow Jones Industrial Average is up some 20% from February 2020.
Many Americans no doubt felt flush from rising asset prices and generous transfer payments—at least until the inflationary side effects hit.
Price increases are erasing even hefty nominal wage gains.
Real average hourly earnings ticked up 0.1% in January but are 1.7% lower than a year ago.
Real average weekly earnings are down 3.1%.
Wages have been surging for lower-skilled workers especially in leisure and hospitality, but not enough to offset rising prices, since they spend more of their paychecks on food, energy and rent.
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The biggest inflation mistake since the 1970s calls for a sharp turn in fiscal and monetary policy.
President Biden’s floundering Build Back Better Act, even in smaller form, deserves a final burial.
Sen. Joe Manchin was right to oppose the bill, and his worries about inflation have been borne out, as he noted Thursday.
The economy needs a trade and deregulation agenda that will lower prices, not a regulatory onslaught that will raise them.
The Fed’s challenge is also increasing, as markets may finally be acknowledging.
The central bank’s preferred path of three or four quarter-percent hikes in interest rates will still leave rates negative.
The Fed’s bond portfolio will also have to be reduced sooner rather than later.
Unwinding this two-year unprecedented monetary experiment will itself be an experiment, and one risk is the Fed gets spooked by the market reaction to its tightening.
The pain might have been lessened if the Fed had begun to withdraw its pandemic money rush more than a year ago.
But Washington had grown to believe that a new era of cost-free spending and low interest rates had dawned.
The old fiscal and monetary verities no longer held, and those who warned about inflation were proclaimed to be dinosaurs from the Reagan era.
Relearning those lessons will now be much harder than it should be, and the American worker will now pay the price.
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