Manu Fernandez/AP Photo
A customer pays for vegetables at the Maravillas market in Madrid, May 12, 2022.
Gerald Ford once had a plan to whip inflation. It was called “Whip Inflation Now.” It mainly consisted of buttons with that slogan on them. Several years later, the Fed caused the deepest recession since 1937 and inflation was whipped.
Joe Biden doesn’t have a button; he has an op-ed in The Wall Street Journal. And it boils down to this: The Fed will slow down the economy, and inflation will be whipped. That’s not how Biden precisely puts it: He says that job growth will decelerate, which would look nothing like the Volcker recession of the early 1980s. But he does say that “the Federal Reserve has a primary responsibility to control inflation.” Virtually everything else in the plan he lays out in his op-ed relies on action from Congress that hasn’t happened and isn’t terribly likely in the few weeks before campaigning for the midterms takes precedence.
The Fed is clearly eager to push the one button it has to make money more costly to borrow. Some seem more eager than others, like Fed governor Christopher Waller, who wants to push interest rates up beyond a “neutral” level, “so that it is reducing demand for products and labor”—in other words, so that it actively and deliberately harms the economy. I get the sense that Chris Hedges’s book title, War Is a Force That Gives Us Meaning, applies to a cohort of central bankers, who seem to relish the opportunity to fight inflation with interest-rate surgical strikes, ignoring the collateral damage to working people.
But before we commence with the pain, we might want to take into account the global reality in the West. The last reading of inflation in the U.S., in April, put it at 8.3 percent (a slight drop from March). The latest reading of inflation in the eurozone, in May, put it at 8.1 percent. So-called “core inflation” (excluding food and energy) remains higher in the U.S., but anything inflation-related that places energy costs to the side isn’t a good barometer of how the average person is impacted.
The reasons for the energy spike in Europe—a whopping 39.2 percent—obviously derive from Russia’s invasion of Ukraine, and the EU’s new decision to phase out Russian oil and revoke insurance on tanker vessels will worsen that (although pipelines, about one-third of European oil imports, are exempted, mainly thanks to Viktor Orban’s Hungary, and it won’t be fully implemented until the end of the year). But U.S. energy inflation was around 30 percent in the last inflation reading here, for the same reason—even though America doesn’t consume much Russian oil or gas, it’s a global market and prices fluctuate in tandem.
So in both the U.S. and Europe, the exogenous shock of war has sent prices skyward. That’s functionally the same dynamic that we saw post-pandemic and pre-invasion, and it should give pause to those who are so confident that U.S. overheating is the root cause of inflation.
Indeed, the major difference between the U.S. and the eurozone at this point is the recovery of living standards in the U.S. to a pre-pandemic baseline. Germany and other rich European countries continue to be either just at or below pre-pandemic consumption levels, while the U.S. is well above that (witness the highest Memorial Day box office opening in U.S. history with Top Gun: Maverick). Yet the inflation rates are virtually the same, despite how much we hear that runaway U.S. spending is to blame.
It’s the global factors that are simply more responsible, and they’re all still with us.
For all the bluster about running the economy hot—which is undoubtedly driving the Fed’s response—I still have yet to see any analysis that attributes more than just one to two percentage points of inflation to pandemic relief measures, meaning that inflation would still be at its highest point in a couple decades without that relief, only many households wouldn’t have the same cushion to survive it.
It’s the global factors that are simply more responsible, and they’re all still with us: the Ukraine war, disruptions to production, continued supply chain tangles related to those production shocks, and the opportunistic way dominant suppliers and retailers are reacting. For example, analysts report that global semiconductor prices are set to hike because of a combination of rising costs for raw materials (like chemicals), the enormous amount of energy used in manufacturing, the inability to find available labor, and “because they can,” an amalgam of every factor I just identified. Even the positive developments here, like the easing of pandemic lockdowns in China after weeks, also have negative aspects, because renewed transportation and therefore oil use will pick up, adding to demand in a supply-constrained environment.
To the extent that America is the exceptional nation here, it’s because our corporations are more powerful and our logistics systems are less efficient. A report released last week put the Ports of Los Angeles and Long Beach, the docking point for nearly half of U.S. imports, dead last in global port efficiency, which increases domestic delays beyond any other nation. Even as manufacturing of containers (which mostly happens in China) has ramped up to deal with supply chain snarls, the boxes are piling up at U.S. ports, an unavoidable capacity problem that speaks to decades of disinvestment. Trains, trucks, and warehouse space also remain scarcer than they should be here; Prospect readers are familiar with the reasons why.
How will rising interest rates affect these dynamics? The Fed’s interest-rate mechanism bluntly kicks more people out of work and dries up discretionary dollars in family budgets. That has begun to work a bit, and some experts are predicting that inflation has already peaked. There’s also likely to be some clearance sales soon, as retailers are holding too much of the wrong kind of inventory, a predictable consequence of the “bullwhip effect,” when suppliers get the amount of goods expected under high demand to stores after demand falls. (As I’ve written, the bullwhip may have whipped back with some products, thanks to the Chinese lockdowns.)
But the blind fury at inflation could lead the Fed to shoot first and ask questions later. The first channel the central bank has really affected, mortgage rates, is leading to increased housing inventory for sale, which will likely push down prices. It’s also led to a rise in adjustable-rate mortgages with lower rates in the earlier years, as borrowers strain to get financing that will cost them a lot more. These may be safer products than the bubble era of the 2000s, but any overstretching to get borrowers into mortgages could prove dangerous.
Some of what the Biden administration is doing, like cracking down on contracting from an ocean shipping sector that made an unbelievable $59 billion in the first quarter of the year, is sorely needed. Last week, the first of three regulations strengthening the Packers and Stockyards Act was released, which would attack the market conditions of meatpacking, one of the biggest drivers of inflation. These are legitimate attempts to reduce the cost of living by taking on corporate control, putting us more in line with our global counterparts.
Trying to tame supply shocks through slamming demand down to lower levels is brutal, even if it’s effective, and there’s good reason to question whether it will be. Interest rate hikes still won’t end the Ukraine war, or get shuttered factories in Asia to open. The Fed can whip inflation, but the public will bear the brunt of the lash.
