High prices are hurting Americans. The Consumer Price Index (CPI) hit 8.6 percent in May, a forty-year high. Politicians in Washington, DC say they’re worried about high prices, but until recently, they haven’t been willing to do anything about it.
President Joe Biden puts the blame on what he calls the “Putin price hike.” Higher prices, he claims, are being driven by rising international oil prices due to Russia’s invasion of Ukraine. However, Biden’s story is wrong for two reasons.
First, Russia’s war with Ukraine has had a much smaller effect on oil prices than many people think. Russia invaded Ukraine on February 24, 2022. However, most of the increase in oil prices occurred in 2021, when other consumer prices were also rising.
At the start of 2021, the price of oil in the West Texas Intermediate crude oil market was $47.47. By mid-February 2022, the price had more than doubled to $95. Since the invasion, the price has increased to $118. Yes, the price is up, but most of the increase occurred before the war even started and therefore can’t be attributed to Russian president Vladimir Putin.
Second, U.S. consumer prices are increasing across the board, not just for oil. Food prices have risen by more than 10 percent over the past year. Meat, poultry, fish, and eggs are up by an average of 14.2 percent. The prices of other items, like clothing and housing, are up five percent or more. The index of core personal consumption expenditures (PCE), which excludes food and energy prices, is up 4.8 percent.
If high oil prices are not the primary cause of inflation, then what is? The simple answer is too much money. When the government puts too much money into the economy, it encourages people to spend more, which eventually causes sellers to raise their prices. This has made the typical American worker poorer: their paychecks have been rising less than the prices of things they buy.
The Federal Reserve is the agency that manages the U.S. money supply. During the pandemic, the Fed injected trillions of dollars into the economy, which encourages Americans to borrow and spend, and eventually drives up prices. It also cut interest rates to almost zero, which also increases spending by making it easier for businesses and individuals to borrow. The Fed intentionally stimulated the economy to speed the recovery after the pandemic, but it kept this stimulus going too long, leading to overspending and inflation.
Like Biden blaming Putin, the Fed has blamed inflation on rising oil prices and supply-chain problems. But those excuses became less plausible over the past year as inflation proved to be more persistent and widespread than the Fed expected.
Congress is also partly to blame. They increased spending by roughly $5 trillion in 2021, much of which was unnecessary since it came when the economic recovery was already underway. The Fed supported these programs by purchasing more than half of the Treasury bonds issued to accommodate the increased spending. The Fed’s actions meant that most of the federal government’s pandemic spending won’t be paid for with regular taxes. Instead, Americans will pay for it through higher prices of the things they buy.
Now that they realize the extent of inflation, Fed officials have finally started to tighten monetary policy, but their efforts have been too little and too late. Widespread inflation was apparent by the fall of 2021, but Fed officials made only minor changes in policy. They waited another six months before raising interest rates or ending their bond-buying program.
In June, the Federal Open Market Committee (FOMC) finally changed course, raising short-term interest rates by 0.75 percentage points. Market expectations of inflation over the next five years declined from 3.11 percent per year to 2.8 percent per year following the decision. However, given that the median FOMC member’s projections for PCE inflation are 5.2 percent for 2022 and 2.6 percent for 2023, it appears more drastic measures will be necessary to fix the massive inflation problem.
Inflation is harming Americans, but politicians and Fed officials are unwilling to do anything about it. Blaming Putin won’t stop it. Blaming supply chains won’t stop it.
The only way to stop inflation is to stop excessive money printing and government spending.
Thomas L. Hogan is senior research faculty at the American Institute for Economic Research. He was formerly the chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs.