Last week’s report of 9.1 percent inflation was difficult. Indeed, Sen. Joe Manchin (DW.Va.) found it so shocking that he put a “hold” on plans to move the proposed economic legislation. Now he says he’s open to taking steps to lower prescription drug prices and help lower-income people get access to health care, but wants to see what increases next month before deciding whether to implement other climate-related legislation. change and reduce the deficit.
We now have evidence that inflation is slowing, but consumers naturally want the government to do everything it can to reduce inflation. So, what can the federal government do?
Although the details are complex, and highly contested by economists, the main explanations of the available options are simple.
It has been found that completing and advancing the expected income is one of the most important things that can be done to reduce inflation and protect the labor market that we have had since the end of the recession due to the coronavirus.
To understand how to beat inflation, we need to understand what is causing it – and what it may cause in the future. Inflation, both here and in other developing countries, has risen to levels not seen in decades due to a host of factors, none of which by themselves would cause inflation to drop nearly as much.
First, we have the problems caused by the coronavirus pandemic. While lockdowns are a thing of the past around the world, China’s Zero-COVID Policy continues to severely disrupt manufacturing. Shanghai, China’s largest city, was put under strict lockdown for two months recently, while other cities lost much longer. As factories reopen and try to make up for lost production, shipping networks are overloaded. As we and the rest of the world rely on products made in China, this has created a shortage, with prospects buying up prices for what is left.
The US can do little to directly affect these problems. While we are doing our best to limit the spread of the coronavirus, the number of infections is disrupting production in China or elsewhere. President Biden could also modestly reduce the cost of Chinese goods by removing some of the tariffs left over from President Trump’s trade war.
The second reason for the increase in prices is different types of supply problems – these are related to the Russian invasion of Ukraine. Western sanctions on Russia, as well as Russian looting of Ukrainian stores and embargoes on Ukrainian food, have led to food and energy shortages, leading to rising global prices. With Russia the largest producer of oil and gas and both countries trading grain and cooking oil, these effects will continue until the end of the war. Our support for the Ukrainian people – the impressive fruits of which can be seen in the explosion of weapons in the territories occupied by Russia – is the best way to speed up the end of the conflict, for the good of the Ukrainians and for ours.
The third main source of inflation seems to be that our economy is burning badly: that in the rapid recovery of the epidemic, more money is chasing fewer goods and services. This is one thing that separates the U.S. from Europe and other economies: They provided little relief to their people during the recession and have had a slow recovery and job losses.
One way to slow the economy is for the Federal Reserve to raise interest rates. This reduces costs by making it more expensive, while employers need fewer employees. When this goes too far, as it often does, the consequences are devastating.
Another way to deal with the fiscal deficit is to reduce the federal deficit. Federal deficits are essential in recessions to stabilize the economy, but during booms they can fuel the fire. The economic package Sens. Manchin and Chuck Schumer (DN.Y.) negotiated to give half of his budget to reduce the deficit. Coming at a time when the deficit was already low and the cry of reducing the deficit was not dominating the airwaves, this will send a strong signal to the financial markets. It could also convince the Federal Reserve that it didn’t need to hit the brakes harder.
Perhaps the biggest concern in fighting inflation is preventing inflationary expectations from entering the economy. If everyone expects the prices they pay to continue to rise in the future, businesses will raise their prices on purpose and workers will demand higher wages, making those expectations self-fulfilling. To date, medium and long-term inflation expectations remain low.
In order to prevent inflation expectations from materializing, policymakers must reassure markets and the public that the conditions driving today’s inflation will not continue into the future. European officials have had trouble making the case because of their dependence on oil and gas from Russia, which has proven to be as unreliable as it is brutal.
We can keep inflation expectations low – and reduce inflation in the meantime – if we show the markets that we are diversifying our strengths. In particular, solar and wind power cannot be cut off by an alien despot. Accelerating the growth of these two industries is the main goal of the powerful piece of legislation that Sens. Manchin and Schumer discussed it. Seeing Congress act to reduce deflation should also reassure markets that Congress and the Federal Reserve are working together to reduce inflation rather than fighting each other, as has sometimes been the case in the past.
Taking tough but measured measures to combat inflation, while supporting the growth of clean energy industries that will provide more jobs in the future, is a way to ease fears of a recession, which would prompt employers to cut their workforces quickly.
Instead of being a reason to give up on clean energy and reduce the deficit in the part of the economic policy that is expected, the latest inflation report provides a good reason to move forward.
David A. Super is a professor of law at Georgetown Law. He also served for several years as a senior advisor to the Center on Budget and Policy Priorities. Follow him on Twitter @DavidASuper1