The author is a Senior Fellow at Brown University and Chief Global Economist at Kroll
American Democrats have a problem. They face midterm elections in November with inflation outpacing wage growth, which means living standards are falling. But there is very little a president or political party can do about it.
Inflation is impossible to miss for voters, with consumer prices rising 9.1% in June from a year ago. More than half of voters blame the policies of President Joe Biden, who has made tackling inflation his top economic priority, according to a Morning Consult survey.
Another Morning Consult poll shows a larger percentage of voters think the president has a lot of control over inflation management; more than the Federal Reserve (whose official mandate includes price stability), Congress or big business.
No wonder the president has declared inflation “the bane of our existence.” There are some fiscal policies the government could implement to curb inflation, but they would only reduce prices at the margins – more signals of virtue than real impact.
The claim that Biden’s 2021 fiscal stimulus overheated the economy and drove up prices isn’t quite right. A study by the San Francisco Fed found that about half of the inflationary push came from supply factors: supply chain issues, Covid lockdowns in China and Russia’s war on Ukraine. Only about a third came from increased demand. Although the stimulus has fueled inflation, it is unwinding this year. The United States is facing the second largest budget cut in its history, which will dampen demand.
But with gasoline prices at the pump in the United States rising more than 40% in the past year and food prices more than 10%, voters have not yet noticed. Energy prices are responsible for about half of soaring inflation in the United States, but no president could have the tools to bring them down by Election Day. The White House’s April announcement that it would release more than a million barrels of oil a day from the Strategic Petroleum Reserve stabilized prices for some time. But the International Energy Agency estimates that this only replaces about a third of the supply lost to the war in Ukraine.
The administration is also urging other producers to increase supply. Biden has sent senior officials to visit Venezuelan leader Nicolás Maduro and is reportedly considering easing sanctions on the country in exchange for oil. Biden then traveled to Saudi Arabia for talks with Crown Prince Mohammed bin Salman, the kingdom’s daily ruler. He left without a public Saudi commitment to increase production.
So far, the world has not signed on to the US administration’s proposed price cap for Russian oil. Although it could help reduce oil prices, it would undoubtedly be leaky. India and China would be likely to buy oil at prices just above the cap, and OPEC+ would be unhappy with lower prices.
More oil should mean lower prices. US producers are starting to ramp up drilling, but Democrats’ drive to increase alternative energy sources limits incentives to invest in carbon assets. A problem with all of these efforts is that the oil is sold on a global market. Chronic underinvestment in fossil fuels and Europe’s diversion of Russian energy means oil prices will be higher for years, not months. Additionally, many refineries were mothballed as demand plummeted during the Covid lockdown. The lack of capacity means gasoline prices will remain high even when oil prices fall.
Congress could vote to raise income taxes, dealing a blow to demand, but that’s a political non-starter. Instead, he’s considering waiving the federal gas tax — it’s about 18 cents a gallon, which isn’t much compared to an average price per gallon of about $4.50. Drivers would not get all the benefits, as the energy companies pay part of the tax. Reducing gasoline taxes also generates higher demand, driving up prices.
Biden waived environmental rules, allowing ethanol to be added to gasoline during the summer driving season. But only 2,300 gas stations nationwide offer this blend. Agricultural analysts fear that the increased demand for corn to make ethanol could push farmers to shift wheat production, fueling food inflation.
Beyond oil and gas, the Biden administration wants to crack down on price gouging by companies in sectors that lack competitiveness. A White House analysis, for example, found that high concentration in the meatpacking industry drives up prices. A poll this year showed that more than half of voters blame inflation on a lack of business competition, but about two-thirds of economists disagree. Market concentration has been high in a number of US industries for years without triggering an acceleration in inflation.
Biden could cut tariffs. Trump’s removal of tariffs on $360 billion of Chinese imports could reduce consumer price inflation by 1 percentage point, according to a study by the Peterson Institute. It may not be worth ceding weight to China in trade negotiations. A broader reduction of 2 percentage points in tariff equivalent could reduce the CPI by 1.3 percentage points. Yet the impact would be primarily on goods, not where inflation hits hardest – fuel, food and housing.
That makes Biden’s first point in his inflation-fighting plan the most effective move for Democrats: leave inflation-fighting to the Fed. It will take time and there is a risk that the Fed will trigger a deadly recession. If lowering inflation is the top priority, however, it’s the only thing guaranteed to work.