Though apparently dedicated to winning the battle against inflation, Fed Chairman Powell is fighting a lonely battle that will be difficult to win, at least with an election taking place. There are limits to what the Fed can do when Congress and the White House are busy printing more money. Yes, even after a six-month long Fed effort to raise interest rates, U.S. inflation is still running at a hot 8.2%.
It will take time and restraint from Washington before things have a chance to calm down. Because inflation’s causes lie in politics as much as economics, let’s look past election-dominated 2022 for possible relief. There are some early data to support this hope.
For all the talk about the what’s behind the diminishing buying power of our money—war, supply chains, energy prices—inflation can still be thought of simply. Flood the economy with enough money and it will start to lose its value. That’s how White House and congressional efforts to forgive debt and increase spending have been countering the Fed’s action.
In just the last six months, the Biden administration has initiated massive student debt write-offs as well as forgiven billions of dollars of farmer-owed debt and assisted drought-distressed people in the Southwest by way of the misnamed “Inflation Reduction Act.” (It is worth noting that the Wharton school’s dispassionate review of the act found the effect on inflation to be “indistinguishable from zero.”)
Whatever one thinks of these policies, they mean that while the Fed is hitting the brakes, the White House—perhaps fearful of what midterm elections will bring—is goosing the accelerator. And Heaven help us to get past efforts by Democrats and Republicans alike to spend and score political wins with their constituents and secure majority positions in the House and Senate. Once midterm “crazy season” is over, it’s clearly possible that some of the inflation heat may subside.
We can also see data backing this up. Inflation, as reflected by the Consumer Price Index (CPI), could hit the healthier 2% range again late in 2023. Hope comes from examining another measurement—M2—which tracks the U.S. money supply by accounting for U.S. cash, deposit assets and other near-money accounts.
The money supply exploded in early 2020 with COVID-19 relief spending; CPI-registered inflation accelerated about 12 months later. It was a textbook case of too much money chasing too few goods. Now, the latest M2 reading is back at a pre-COVID level. That suggests more normal inflation levels about 12 months from now.
Of course, some of those aforementioned other inflation factors must still be noted. There is always more to the story, including Ukraine-war driven energy price increases, supply chain disruptions, and labor market challenges that emerged during the pandemic and remain to deal with.
It is for this reason that some are suggesting the Fed should be happy with 4% inflation rather than 2%. After all, this thinking goes, living with a little more inflation might be preferable to sustaining the bitter medicine of an economy slowed down by the Fed. But it’s also possible that war-caused disruptions in energy and other markets will eventually disappear, making the job of hitting the ideal target easier (though by no means painless).
Yes, we can be optimistic that inflation will be under control in 2023. That is, if the Fed is not forced to hit the brakes harder to offset an election-year spending binge. Let’s just hope Congress will not be inspired to write another so-called Inflation Reduction Act any time soon.
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ABOUT THE WRITER
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson College of Business, and a former executive director of the Federal Trade Commission.
