Biden’s Policies Lead to Unexpected Rise in Inflation Despite Fed’s Efforts to Lower It
COVID Stimulus and U.S. Inflation Rate
A study released in January 2022 by the Federal Reserve Bank of St. Louis concludes that 2.6 percent of the U.S. inflation rate for the 12 months ended February 2022 was due to COVID-related fiscal stimulus. This represents about one-third of the rampant 7.9 percent inflation experienced.
The St. Louis Fed’s methodology did not include the inflationary impact of the increase in the supply of money due to Treasury borrowing and Federal Reserve monetization of this debt but rather focused on the increase in aggregate demand caused by fiscal spending, which seems to be a relatively conservative approach to the data. Other economists argue that the enormous increase in the money supply caused by government spending is the major driver of the high inflation that we have experienced.
- The period covered by the St. Louis Fed’s study ended in February 2022 when Russia invaded Ukraine. It therefore did not include much of the inflationary impact on energy and other prices caused by the conflict.
- The Biden administration attributed inflation largely to transitory supply chain problems.
- The Biden administration passed the $1.9 trillion American Rescue Plan in 2021.
- The Trump administration passed the $2.9 trillion dollar aid packages in 2020.
- The Fed study concluded that while the Fed has been battling to reduce inflation by raising interest rates, the Biden administration has been working at cross purposes to boost inflation by increasing government spending.
The key takeaway from the St. Louis Fed study is that President Biden’s repeated denials in 2022 that government stimulus had any significant impact on inflation were incorrect. The Fed study makes it clear that fiscal spending had a major impact on inflation. Furthermore, the claim of progressives who embrace so-called modern monetary theory, which holds that governments using fiat currency can borrow, print money and spend freely without significantly raising inflation or suffering any other adverse consequence, is the nonsense that it sounds like.
The COVID-related fiscal stimulus packages passed by the Trump and Biden administrations in 2020 and 2021, respectively, have had a significant impact on the U.S. inflation rate. The St. Louis Fed study, while conservative in its approach, makes it clear that fiscal spending has had a major impact on inflation. The Biden administration’s decision to continue stimulus programs that were no longer needed has further contributed to inflation. It is clear that governments cannot borrow, print money and spend freely without significantly raising inflation.