Beginning in 2021, the U.S. and the world as a whole began to experience rates of high inflation. Just between August 2021 and August 2022, prices in America have risen 8%.
Many have blamed the rapidly rising prices, the worst bout of inflation witnessed since the 1980s, on Democratic policymakers and the incumbent administration. In fact, economic instability is predicted to have a negative effect on Democrats’ midterm performance, despite arising from causes largely outside of the control of the executive or legislative branch. Most American voters seem to view inflation as a political issue, or one that can be ameliorated in an election. This simply isn’t the case. But why exactly is inflation reaching such record high levels, and who (or what) is to blame?
Inflation initially began as COVID-19 levels decreased. When vaccines became readily available, and lockdowns and travel bans were lifted, the economy saw a huge influx in consumer purchases and travel. Most Americans actually added to their savings during the pandemic, meaning people had lots of extra cash on hand for travel and non-essential purposes. This led to a huge rise in spending later on.
The labor shortage in the U.S. is another contributing factor. For every unemployed worker, there are two vacant jobs that need filling. And as companies try to attract workers, they raise wages. I saw this in my own town, driving past Chipotle all summer, and watching the starting pay advertised in the window gradually increase from 15 dollars an hour to more than $17. These raises are reflected overall, with median pay growing 7% in the last year. And as wages rise, so do costs.
Lastly, most people are aware of the disruptions to the supply chain caused by COVID-19. For example, computer chips, one of the most critical components in assembling technologies from laptops to cars, are demanded far more, yet the chips, assembled in labor intensive factories overseas, became subject to supply chain issues due to lockdowns and pandemic regulations.
So, while some might blame the rising prices on policymakers, and the relief stipends distributed during the height of COVID-19 policy implementation, I think it’s pretty clear that inflation is a complex issue, and a global one – not some malady that can be pinned solely on “Sleepy Joe.” But who holds the responsibility for controlling inflation?
The answer, in part, is the Federal Reserve Bank, which is in charge of the nation’s monetary supply. The Fed has stated their goal is to bring inflation down to the 2% mark.
To lower inflation, the Fed must hike interest rates, which they have done 5 times this year. When interest rates are high, fewer people borrow money, and spending decreases. In fact, mortgage rates have surpassed 6% compared to their 3% level last year. As spending and investment decreases, demand falls, and with less demand, job growth slows. While inflation slowed slightly in August, it was still higher than expected, meaning the Fed is likely to hike interest rates again.
On the other hand, the Inflation Reduction Act, which passed through Congress in August, takes on a different role. Despite its name, this spending package is unlikely to have any real benefit on inflation, according to a study by the Penn Wharton Budget Model. The general effects of the bill are positive: limiting the growth of prescription drug prices, providing stipends to the clean energy industry, and more.
But the bill is not going to reduce consumer spending, or fill labor shortages, which is what is ultimately needed to slow inflation. Essentially, Congress has little ability to curb inflation through any legislative measure. Responsibility for controlling the inflation of the dollar falls to the Federal Reserve, an entity that is not held accountable by midterm results.
Yet, ahead of the November midterms, 31% of voters say they prioritize the economy above all other issues, and these voters tend to be Republican by a wide margin. Over half of Americans think Biden’s presidency has weakened the economy, and voters trust Republican management of the economy far more than that of Democrats. Inflation has only exacerbated these concerns. Take gas prices. Biden and his administration have received much of the blame for rising gas prices, when the hike is actually a result of global supply shortages. Voters are attributing economic hardship and rising prices to politics that have very little influence on these issues.
Ahead of the upcoming midterms, Democrats have tried to attract voters who don’t prioritize inflation and rising prices in their electoral decisions. Campaigning on issues such as gun control, abortion, and the environment, has served Democrats well— but the economy is an issue that is hard for most Americans to ignore.
Inflation does not have a quick and easy fix. Moreover, it doesn’t have a political driver. Inflation and its effects derive from the turbulence of a worldwide pandemic and consequent supply chain issues. What voters need to understand is that inflation is a global phenomenon, not an issue of government mismanagement.