Some politicians have accustomed us to manipulation of the truth through clever demagogic techniques or by attributing these falsehoods to their adversaries. During the last American presidential debate, Donald Trump did not fail to make several.
One of his statements on inflation particularly struck me: the one accusing the Biden-Harris government of having plunged the United States into an insurmountable inflationary crisis. He then claimed that inflation had reached 21% under their mandate and that the prices of many goods had increased by 50 to 80%. The reality is that inflation peaked at 9.1% in June 2022, a far cry from the 21% claimed by Mr. Trump. Additionally, only a few product categories, notably eggs, have seen spectacular increases like those mentioned.
And even though inflation peaked under the Biden-Harris administration, they are not to blame. Because, unless there is a collapse of an economy or a major external shock like a war, inflation does not appear in the economy overnight. Just like it doesn’t disappear overnight.
Generally, in countries with a stable economy, inflation is rarely a problem since independent institutions and central banks manage to control it effectively by adjusting interest rates to influence demand and stabilize prices. Over the past century, the United States has only recorded an inflation rate above 5% in three periods: in the 1940s, because of the Second World War; in the 1970s, with the oil crises; and more recently, in 2021-2022.
Central bank monetary policies, like government policies, take time — often 6 to 24 months — to affect the economy. So where does this recent inflationary surge under the Biden-Harris administration come from?
The most obvious factor is the COVID-19 pandemic, which has severely disrupted global supply chains, putting considerable pressure on supply. The stimulus measures implemented under Trump, like those of other governments, supported the economy by injecting massive liquidity into the economy. While it averted an immediate crisis, this gesture also amplified demand at a time when global production was slow. With negative real interest rates and direct financial aid to households, the economy saw an explosion in demand for goods, but supply could not keep up, creating strong inflationary pressure.
An inflationary breeding ground
When Trump took office in 2017, the U.S. economy was already doing well, with low unemployment and controlled inflation. GDP was growing and the S&P 500 had just increased by almost 10% in 2016. However, his 2017 tax reform, which largely benefited businesses and wealthy households, boosted an economy already close to overheating. As the U.S. Federal Reserve attempted to normalize interest rates to avoid overheating, Mr. Trump’s tax reform fueled more demand — a breeding ground for inflation.
Importantly, this tax reform significantly reduced the government’s tax revenue, thereby widening the budget deficit at a time when the economy did not require such a stimulus. The measure accentuated macroeconomic imbalances and set the stage for price hikes long before the pandemic struck.
In addition, there is the trade war that he has started against several of the United States’ partners, notably China. One of the most notable decisions of this period was the imposition of tariffs on hundreds of billions of dollars of Chinese goods. These tariffs have had a direct effect on prices, because when imports become more expensive, American companies pass the bill on to consumers — another breeding ground for inflation.
Although Trump has often claimed that China is paying for these tariffs, the reality is that it is primarily American businesses and consumers who have borne the brunt. In this context, the assertion that inflation is entirely due to the Harris-Biden government appears to be fallacious.
While certain recent measures have prolonged inflationary pressures, notably new stimulus plans and public investments, it is important to remember that the roots of this inflation go back to decisions taken well before Joe Biden’s arrival in the White House. . Current inflation is therefore much more the product of a tangle of economic and political factors, straddling several governments, rather than a simple consequence of the actions taken by the current leader of the United States.
The economy is a complex mechanism. Decisions made today often only have effects after several years.
The good news is that inflation has finally returned to the central banks’ target of between 1 and 3%. No matter which candidate wins the US presidential election in November, none of them can really claim responsibility for this improvement. In reality, central banks were able to control the situation by avoiding fanning the flames with excessively muscular policies, thus stabilizing an overheating that had started in recent years.