Credit Sesame looks at who’s to blame for high inflation in the U.S.
High inflation in the U.S. is squeezing household budgets, threatening credit scores and making people worry about being able to afford retirement.
Who is to blame for today’s inflation? Credit Sesame rounded up some of the usual suspects.
President Biden
Fairly or not, the sitting president usually takes the heat for any economic problems. President Biden’s poor approval ratings may be caused partly by the spike in inflation.
According to political analysis site FiveThirtyEight, the percentage of people who say they approve of Biden’s performance first dipped below the percentage who say they disapprove back in August of 2021. That’s right when inflation started to take off.
But is Biden really to blame for inflation? He does have a couple of inflationary policies to account for:
- He authorized a third round of COVID stimulus checks in 2021, even though the economy was already bouncing back from pandemic shutdowns. This sparked a consumer spending spree at a time when there were still supply-chain shortages – a sure recipe for inflation.
- He has used boycotts and tariffs against various countries as a foreign policy weapon. The reasons for this may be justified, but using economic tools for foreign policy objectives has a price.
That said, figures from the Financial Times show that U.S. inflation is fairly moderate compared to other countries. For example, much of Europe is suffering from double-digit inflation. So, perhaps the American president should be thanked for keeping it as low as possible.
Former President Trump
Former President Trump set the stage for President Biden, who continued the same inflationary policies as his predecessor.
As President, Donald Trump also made COVID stimulus checks widely available, even though most recipients had not lost their jobs due to the pandemic. He also used punitive boycotts and tariffs to pursue foreign policy objectives.
For all the political antagonism, Trump and Biden have contributed to high inflation in the U.S. in similar ways. That means they both share some of the blame for inflation, but by no means all of it.
Vladimir Putin
There seems no doubt that the Russian president has contributed to inflation. In fact, he may be the world’s public enemy number one in that regard.
Putin’s invasion of Ukraine disrupted the flow of global oil, wheat and natural gas supplies. The natural gas shortage is hitting Europe especially hard, since it relies heavily on Russia for that energy source.
Still, Putin may be a villain, but even he can’t be held responsible for some aspects of inflation. For example, the supply chain problems and labor shortage in the U.S. are inflationary forces that Putin has nothing to do with.
Jerome Powell
As Chair of the Federal Reserve, Jerome Powell takes the heat for its decisions. In truth though, the Fed’s interest rate decisions are made by a committee that usually votes unanimously or close to it.
The Fed has been criticized for allowing inflation to take hold by being slow off the mark when it came to raising interest rates. There may be merit to that criticism.
Inflation started to accelerate in early 2021. Yet, it wasn’t until March of 2022 that the Fed started raising interest rates. They miscalculated inflation as a temporary bounce after the sharp drop in economic activity during the 2020 pandemic shutdowns. One problem with inflation, though, is that once it gets going, it has a way of feeding off itself.
Still, while Powell and his colleagues at the Fed can be accused of being slow to react to rising inflation, they didn’t start the problem.
Janet Yellen
Janet Yellen is Powell’s predecessor as Chair of the Fed. The Fed had lowered interest rates to near zero in reaction to the 2008 financial crisis. They were still near zero when Yellen took over as Chair of the Fed in 2014.
By that time, the economy had been recovering for over four years. Employment growth started to take off during Yellen’s first year. It might have been a natural time to start to raise interest rates toward more normal levels.
And yet, Yellen’s Fed held off. They didn’t start to raise rates until December of 2015. Even then, it was a very timid approach. A 25 basis point increase in December of 2015, and another 25 basis point increase a full year later.
It may be that Yellen didn’t want to raise rates too soon into her tenure for fear of giving a false signal that she represented a radical change in monetary policy. Still, she may have limited the Fed’s range of policy approaches to future crises by keeping interest rates well below normal levels several years into an economic recovery.
The Fed funds rate has yet to return to its historical norms. In that sense, the Fed is still trying to play catch-up. As with Powell though, Yellen can’t be faulted so much for causing inflation as for being slow to anticipate trouble.
Other contributors to high inflation in the US
Today’s inflation isn’t driven by any one thing. Prices are up sharply across several sectors of the economy, and around most of the globe. When a problem is that widespread, it probably has more than one source.
In addition to the politicians, the coronavirus deserves some blame for creating shortages of goods and services.
The tendency of the economy to run in cycles can also be viewed as a reason for today’s high inflation. Before the recent price flare-up, inflation was unusually low for 30 years.
And finally, there’s the American consumer. Consumers have been victimized by inflation, but they can also be seen as one of the causes. Continuing to spend despite rising prices and record debt negates some of the Federal Reserve’s efforts to cool off demand.
Living with high inflation in the US
It may be comforting to have someone or something to blame for inflation. However, whatever or whoever the cause, inflation is here. Even when inflation cools, the higher prices it has brought are likely to stay and consumers must adapt. Here are three things to make a priority for 2023:
- Adjust your budget to live within your means at today’s higher prices.
- Reduce your debt because higher interest rates have made borrowing more expensive.
- Update your retirement savings assumptions to reflect the higher cost of living you face due to inflation.
If you enjoyed Which Politician is to Blame for High Inflation in the U.S? you may be interested in:
- How Inflation Threatens Retirement Savings
- Balancing the Inflation-Recession Tightrope with Interest Rates
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
