Inflation isn’t just an economic headache — it’s become a political blame game that will almost certainly define this year’s midterm election campaigns.
But the cause of inflation doesn’t lie with any single government action or lack of action. And fixing it — that is, bringing current inflation of 7% back down to the more comfortable 2% level — is similarly well beyond the scope of any one lawmaker, central bank or economist. Many of the increases are the result of global market forces, such as higher energy prices, or global supply chain problems limiting the availability of parts needed to make consumer goods. The limited supply of both new and used cars, largely stemming from a computer chip shortage, has resulted in record car prices — a major factor pushing overall prices up.
Of course, there are worse things than paying higher prices. With strong consumer demand, prices on goods and services that have gone up during the pandemic are unlikely to come down to pre-pandemic levels unless there is a painful recession or a new round of stay-at-home orders caused by a surge in the pandemic. Either of those would result in job losses slamming the brakes on consumer demand, but both would be worse than the price increases they would reverse.
“Give people the choice between losing their jobs or paying more at the pump, people will take higher gas prices,” said Mark Zandi, chief economist with Moody’s Analytics. “You could kill the economy to get demand down, but you end up with a dead economy. It doesn’t make much sense.” President Joe Biden is trying to tame prices where he can. But these steps are mostly Band-Aids, and they illustrate the limits of government power to regulate prices determined by market forces. And Biden conceded this week that the latest inflation reading “underscores that we still have more work to do, with price increases still too high and squeezing family budgets.”