“In the United States, citizens rightly perceive inflation as a tax on their income”

PMuch credit is given to President Joe Biden and his team for their management of the American economy. Aware that the 2024 presidential election, like most elections, will be determined by economic conditions or related perceptions, the president launched into the campaign by repeating that “Bidenomics is bearing fruit”. However, the message is not getting through. A CBS/YouGov poll conducted between July 26 and 28 reveals a approval rating of just 4% in matters of economics.

The explanation is in one word: inflation. American citizens rightly view inflation as a tax on their income. When unemployment is low and they manage to find work, they attribute their good fortune to their individual qualities of seriousness and initiative, not to the government. But when prices go up at the supermarket or gas station, they see it as someone else’s fault. Which is not absurd.

The question then becomes who is to blame. The answer is all the more complex as the recent surge in inflation has multiple causes. This does not exonerate the Biden administration: its $1.9 trillion (€1.771 billion) “rescue plan” announced on January 20, 2021, the first day in office, vigorously supported spending. Too vigorously, we can now say with hindsight, if we add the two recovery plans adopted in 2020 by Trump in March (2,200 billion dollars) and December (900 billion dollars). The additional purchasing power offered to households has certainly strengthened their finances and avoided serious difficulties, but has boosted inflation.

Because, at the same time, disruptions in supply chains and shortages linked to Covid-19 have prevented companies from responding to this increase in demand. Even more, the Federal Reserve (Fed) failed to act preventively. It waited until March 2022, when global inflation was near 8%, to start raising interest rates. Historians will likely explain the Fed’s failure by its tendency to view economic conditions in the rearview mirror: for most of the previous decade, the real and immediate danger was deflation.

Do not appear Panglossian

It took time – too long – for monetary policymakers to recognize that circumstances had changed and respond accordingly. Furthermore, monetary policy is ineffective in countering inflation caused, even in part, by negative supply shocks. The Fed was right to fear that preemptive rate increases would further damage the supply chains of a still fragile economy. The United States may have failed on inflation, but the Biden administration is not responsible for the supply disruptions linked to Covid-19, nor for the Fed’s delayed reaction.

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