Americans are feeling the brunt of historic inflation at gas stations and grocery stores as the U.S. economy recovers from the pandemic and feels shocks from the war in Ukraine.
Consumer prices rose 8.5% over the 12-month period ending in March—the highest in four decades—according to the Bureau for Labor Statistics. That rate fell to 8.3% in April, signaling a possible economic cooldown, but by no means indicating that inflation will end any time soon.
In an op-ed in the Wall Street Journal on Tuesday, President Joe Biden called inflation his “top economic priority” and outlined a three-pronged plan to fix the problem.
1. Trust in the Fed
“First, the Federal Reserve has a primary responsibility to control inflation,” wrote Biden in Tuesday’s op-ed.
The Fed raised its benchmark inflation rate a quarter percentage point in March, ending a three-year stretch of not touching it. The bank raised the rate a further half percentage point in early May.
Though critics have accused it of moving too slowly to address the crisis, the bank currently has bipartisan support in Congress. Earlier in the month, the Senate confirmed Fed Chair Jerome Powell to serve for a second four-year term in an 80-19 vote.
Powell himself has recognized the difficulty in steering the bank’s response to inflation, as moving too quickly increases the risk of a recession while moving too slowly could lead to inflation becoming more deeply entrenched. Prior to the initial rate hike in March, he admitted to Congress: “Hindsight says we should have moved earlier.”
Biden has repeatedly affirmed his respect for the Fed’s independence. On Tuesday, he met with Powell at the White House. In an interview with Yahoo Finance, Brian Deese, National Economic Council Director, described the meeting as an opportunity for the president to talk about the need to “combat inflation while not sacrificing all the economic gains that we have made.”
The president’s support of the Feds helps increase public belief that the bank can alleviate inflation, according to Connel Fullenkamp, an economics professor at Duke University who specializes in financial market regulation. “The Fed has been trying to get a handle on inflation expectations,” he told Fortune.
Getting ahead of those expectations could help a potentially catastrophic wage-price spiral and inflation, according to Fullenkamp.
2. Lowering the cost of everyday goods
The second part of Biden’s plan is a general call to lower commodity prices when the government can. “We need to take every practical step to make things more affordable for families during this moment of economic uncertainty,” he wrote, adding that doing so would presumably increase the economy’s overall productivity.
In his op-ed, Biden specifically called out higher energy prices as a result of America’s ban on Russian oil following its invasion of Ukraine. Clean energy tax credits that were initially included in his Build Back Better Plan, he wrote, could help alleviate high energy prices. Similar credits are currently included in the proposed 2023 federal budget.
Biden also referenced fees that foreign ocean freight companies charge on US imports, the price of prescription drugs, and the housing crisis as additional priority areas.
3. Addressing the national deficit
The third part of Biden’s plan is to reduce the national deficit. In the op-ed, he said that doing so will “help ease price pressures.”
“My plan would reduce the deficit even more by making common-sense reforms to the tax code,” wrote Biden, citing a projection from the Congressional Budget Office that the deficit will fall by $1.7 trillion in 2022. That plan to reduce the deficit even more includes bolstering the IRS to collect taxes already owed and enacting tax policies that incentivize companies to stay in the US rather than shift jobs overseas.
“We should end the outrageous unfairness in the tax code that allows a billionaire to pay lower rates than a teacher or firefighter,” he added.
“I think it’s definitely standard Econ 101 speak,” said Fullenkamp about Biden’s call to increase certain taxes as a means of limiting consumer demand and curbing inflation. “But the political side is always really hard to deliver.”
Can it be done?
Biden sees the US economy as at a crossroads. Coming out of the pandemic, the country is enjoying record job growth in line with a steep decline in unemployment—progress, he says, that can transform into long-term stability.
“With the right policies, the US can transition from recovery to stable, steady growth and bring down inflation without giving up all these historic gains,” he wrote.
Those hopes, however, exist in the context of a global economy made fragile by Russia’s invasion of Ukraine, with inflation not just an American problem.
On Tuesday, the EU reported its highest level of inflation since the euro was created in 1999. In the U.K., inflation is at its highest since the 1980s, prompting warnings that vulnerable groups in that country might soon be unable to acquire essential goods like food and heating.
“Geopolitical events like [the war in Ukraine] have big implications for the market and are definitely beyond the control of policymakers,” said Fullenkamp. “But they can certainly react to these different developments.”
Update, May 31, 2022: This article was updated with comment from Brian Deese, National Economic Council Director.
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