United States: the limits of Biden’s anti-inflation action

United States President Joe Biden has vowed to do everything he can to reverse the price curve, which peaked in October. For its Minister of Finance, Janet Yellen, removing tariffs on Chinese goods could help. But the Biden government actually has few tools to stop the accelerating consumer price hike in the short term.

The rise in prices is directly linked to the economic recovery from the 2020 recession, which caused a mismatch between supply and demand amid an unfinished pandemic and a labor shortage.

Result: prices rose 6.2% in October compared to the same period last year according to official statistics, unheard of for thirty years.

Raising interest rates abruptly would be an effective avenue, but politically very unpopular, because it would increase the cost of credit. It is also a prerogative of the American Central Bank (Fed), an institution independent of the executive power. This measure is also risky given that the labor market has not yet returned to its pre-crisis levels.

During the last period of high inflation in the 1970s and early 1980s, Federal Reserve (Fed) Chairman Paul Volcker himself defeated inflation by raising interest rates to record highs .

“There is not much the government can do on its own to solve the current problem of inflation, beyond trying to convince ports, logistics companies, etc., to increase their capacity, ”said Andrew Hunter, an economist at Capital Economics.

According to him, “the only key lever over which the government has partial control, along with Congress, is fiscal policy.” “But that is not an easy solution”, he agrees, since it would be a question of trying to bring down inflation by organizing a strong contraction in demand, for example by increasing taxes or reducing expenses. Unthinkable at the moment for Joe Biden, who is no longer popular in the polls.

Plans as a response

The president’s chief economic adviser, Brian Deese, said on Sunday that Joe Biden’s economic plans would have a positive impact on prices.

The program devoting 1.2 trillion US dollars to infrastructure spending, the law of which was ratified on Monday by the president, will “help move goods more freely and at a lower cost,” he argued on NBC .

And according to him, the other big plan, of 1750 billion dollars of social spending and investments in the energy transition, still under discussion in Congress, will not create inflationary pressures, “on the contrary”.

“The problem is that such policies typically take years to begin to have an effect on the potential supply to the economy,” Hunter said. Not only will these plans “fail to contain inflation now”, but they could “increase it further, if they translate into further short-term fiscal expansion that stimulates demand.”

The customs track

Tariffs imposed by the Trump administration on Chinese products representing the equivalent of $ 370 billion in annual U.S. imports remain in place. Janet Yellen said Sunday on CBS that the removal of these surcharges “would tip the balance” with regard to inflation.

A questionable analysis, according to Andrew Hunter. He notes that, when they were imposed in 2018-2019, the increase in prices had been limited, offset by fluctuations in exchange rates, companies cutting back on their margins and imports rerouted via third countries, such as Vietnam or Korea.

If tariffs were removed now, the Chinese renminbi could appreciate against the US dollar, and companies would increase “their margins by not passing cost savings on to consumers, especially when consumer demand is still very high. strong, ”he said.

The Biden government would also obviously want to return much of the production of goods to the United States, especially semiconductors, the shortage of which has caused prices to rise. But then again, this will not have an effect in the short term.

Senate Democratic Leader Chuck Schumer, meanwhile, spoke of another avenue as a quick fix, urging the government on Sunday to use emergency oil reserves in a bid to cut gasoline prices.

But at a time of promises on the fight against climate change, the White House is still weighing the advisability of using this rarely used prerogative, the effect of which on the cost of fuel at the pump would only be temporary.

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