Here’s why you can’t blame presidents for inflation
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Here’s why you can’t blame presidents for inflation
During the worst of the pandemic, prices started rising everywhere. Groceries, cars (both new and used), gasoline, housing. At one point, inflation reached 9.1%, the highest level since 1981, although it’s since cooled down.
When things get more expensive, some want to blame the current presidential administration. Former president Donald Trump said both President Joe Biden and Vice President Kamala Harris were responsible for the record levels of inflation that consumers saw in recent years.
But presidential policies did not drive the record inflation we saw during the pandemic, economists told Marketplace.
“I think that people generally over attribute control over the macroeconomy to presidents,” said Tyler Schipper, an associate professor of economics at the University of St. Thomas.
That over-attribution applies to jobs and consumer prices.
Supply chain issues had more of an effect on inflation than policies from either the Trump or Biden administration, Schipper said. There was pent-up demand as the economy reopened, while supply chains were “bogged down.”
In 2020, when the COVID-19 pandemic hit, it became extremely difficult to produce items since factories shut down or workers had to practice social distancing at factories, said Tarek Hassan, an economics professor at Boston University.
Imagine one day everybody had to work with one arm tied behind their back, Hassan said. You’re going to be working at a much slower rate.
A global chip shortage meant there were fewer new cars for sale, which pushed up prices.
Car owners who might’ve sold their old cars to buy a new one kept their vehicles, which ended up constraining the supply of used cars. And rental car companies, who also help supply the used car market, hung onto their vehicles when travel demand recovered. On top of rising demand, these rental companies faced shortages since they sold many of their cars during the pandemic. The mismatch between supply and demand sent used car prices soaring.
During the pandemic, the cost of lumber also rose. A booming housing market and new construction meant higher demand, while supply decreased due to worker shortages, natural disasters, and beetle infestations that had been occurring since the 1990s.
You also have to take into account geopolitical conflicts, like Russia’s invasion of Ukraine, which led to higher wheat and gas prices.
Both Biden and Trump signed COVID-19 relief packages that provided individuals, businesses and local and state governments with trillions of dollars in aid. That stimulus helped stoke demand and contributed to inflation, according to a study from the Federal Reserve Bank of St. Louis. But the St. Louis Fed said it also helped stave off “worse outcomes.”
“The large spending supported a strong economic rebound, with both GDP and employment recovering at a remarkable pace,” according to the study’s authors.
Some policy experts have blamed rising prices on “greedflation,” the idea that corporations took advantage of our inflationary environment to hike prices even further.
An analysis of 100 U.S. corporations from the Guardian found that net profits were up by a median of 49% as they raised prices for consumers. But New York University professor Chris Conlon and some of his colleagues authored a study that found between 2018 and 2022, there was zero correlation between companies with the highest profit margins and the industries with the fastest price increases. In other words, if you saw the price of soda rising a lot, you’d expect major soda corporations to have higher profit margins if “greedflation” were fueling the price.
But their study found that if the price of a good was rising quickly, corporations within that industry did not have the higher profit margins. And vice versa. If some corporations had higher profit margins, the types of goods they were selling were not necessarily the ones rising the fastest in price.
Schipper said he does not think greedflation was the underlying cause of inflation, although he thinks there are some cases where corporations saw the opportunity to charge consumers more.
Hassan said it’s also unfair to blame the president for the level of inflation because prices rose around the world, and some countries had even worse inflation than the U.S. For example, inflation reached a peak of 11.1% in the U.K. and a peak of 10.6% in the European Union.
Inflation has now cooled, with prices rising 2.4% year-over-year, according to the September consumer price index.
There are some, limited ways that presidential administrations could implement policies that lead to price increases. If the economy is doing really well, tax cuts could drive up prices because people have more money to spend, Schipper said.
And presidents can implement tariffs on goods, which can also lead to rising prices.
Read more about how tariffs work here.
Trump has promised sweeping tariffs of up to 20% on all imported goods, 60% tariffs or higher on Chinese goods, and up to 100% tariffs on goods from Mexico if it doesn’t curb unsanctioned immigration.
U.S. consumers would end up having to pay for those tariffs. U.S. importers have to pay import taxes (i.e. the tariffs) to the U.S. government, and to compensate for that lost money, they’ll either eat the costs or pass them along to you in the form of high prices.
Presidents would have greater influence over consumer prices if they could raise or lower interest rates, but they can’t. That falls under the domain of the Federal Reserve, which is politically independent. That means the Fed carries out its goals – price stability and maximum employment – without political interference.
But Trump wants a say. “I think I have the right to put in comments as to whether or not interest rates should go up or down,” he said during a recent interview with Bloomberg News.
If a candidate is up for reelection, they could encourage the Fed to drastically lower rates so that borrowing costs become cheaper, Schipper said.
“That might make the economy grow really fast now, but six months down the line, after the election is over, that might result in really high inflation,” Schipper explained.
That’s why experts say Fed independence is crucial for price stability.
“We want them to focus on the health of the economy and not the number of votes a particular candidate gets,” Schipper said.
Listen to our special on what a Trump presidency would mean for the Fed’s future:
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