How Government Policy Can, and Should, End Inflation Now

The recently released Consumer Price Index (CPI) indicates that for the past year, overall prices have increased by a whopping 6.2%, the highest yearly inflation rate in three decades. While the Biden Administration says inflation is really good because it indicates increased consumer demand, the reality is that inflation is an awful occurrence that negatively affects retirees and lowest-income earners the most.

The Biden Administration says inflation is not its fault, due to the worldwide virus and its subsequent supply chain disruptions. As such, there is little that can be done to reverse it. Leaders in the administration tell us the inflation problem is transitory (i.e. temporary) and will simply go away once the supply chain issues are fully resolved.

The Four Drivers of Today’s Inflation

The first and foremost reason driving the inflation we are just now beginning to witness in the United States is swiftly rising energy costs. Because President Joe Biden wants to end the use of fossil fuels, his policy is to curtail production. In the short term, he stopped drilling and fracking on federal lands. He also stopped drilling off the coast of Alaska. This immediately restricted the supply and drove energy prices up.

In the longer term, President Biden canceled the Keystone XL pipeline. Then he told oil companies that he intends to end the use of fossil fuels completely. This eliminated any future investment by oil companies — and further restricted supply.

Because Biden’s policies drove up the cost of energy, consumers are paying more for gasoline, oil and natural gas. It also means producers pay more for energy, and retailers pay more to have their goods shipped via truck to them. That means higher consumer prices and more inflation.

Biden could immediately reverse those policies and gas prices would plummet. Falling energy prices would put downward pressure on inflation.

Disincentive to Work

Biden discouraged workers who were unemployed due to the effects of the virus, from returning to work. He gave them more free money in his $1.9 trillion completely unneeded stimulus bill, added $300 per week to their state unemployment benefits and reduced their living expenses by allowing them to not pay rent while halting all evictions.

The resulting labor shortage is what led to the supply chain disruptions. Warehouse workers, truck drivers, workers at the nation’s ports, among others, are not fully returning to their jobs. There are currently more than 3 million workers who have left the labor market since the pandemic began and are not returning, mostly because, financially, they don’t have to return.

The labor shortage has resulted in disproportionately higher wages, which drive up prices and could eventually lead to a wage/price spiral. Biden should stop handing out free money and start encouraging workers to return to the labor market.

Excess Demand in the Economy

Most of the inflation is caused by excess demand in the economy. This is due to the federal government spending nearly $6 trillion more than they took in from tax revenue in the last two years. On a $22 trillion economy, this is highly inflationary.

While these funds have been allocated, Biden could reduce future excess demand by stopping the explosion in government spending.

Instead, he has increased spending by another $1.2 trillion to fund infrastructure and other social programs. And he wants to spend another $2 trillion. Good advice to someone who is stuck in a deep hole is to tell them to stop digging.

Biden should stop spending more money. In fact, he should look for ways to immediately reduce government spending which reduces demand and will put downward pressure on prices.

Federal Policy Expands Money Supply by 20%

The worst government policy, which is the largest contributor to the excess demand and high inflation, is the Federal Reserve’s (Fed) monetary policy. Although Fed officials keep hinting they will soon reverse their policy, so far they are staying the course. By increasing the money supply a shocking $120 billion monthly through government bond purchases, the resulting 20% growth in the money supply in the last 12 months is purely inflationary.

Even worse, the Fed has kept interest rates near zero. This encourages borrowing on big ticket items which is driving up the price of things like houses and cars. The Fed should immediately and gradually end the bond buying program and raise interest rates. That would take excess demand out of the economy to put downward pressure on prices.

Make no mistake, it is government policy that is causing inflation. Biden says there is nothing he can do. The truth is he can stop inflation in its tracks by reversing all of these highly inflationary policies.