The United States (US) is in the throes of debilitating inflation. From March 2021 to April 2022, the inflation rate in the US increased from 2.6% to 8.5%. The situation is no different in India, Europe and other parts of the world. Inflation in the US, the worst in four decades, is proving to be damaging for President Joe Biden, whose Democratic Party is projected to lose control of the House of Representatives and possibly the Senate in the November mid-terms. Recognising that danger, the White House has gone into damage-containment mode. Treasury secretary Janet Yellen, who initially maintained that the price hikes were a side-effect of the post-pandemic recovery and were temporary, admitted last week that she was “wrong then about the path that inflation would take.”
What makes the job of Yellen and Federal Reserve chairman Jerome Powell difficult is there is not much they can do. That is because the current rise in food and energy prices is driven mainly by factors outside of their control. They include the Russian invasion of Ukraine and sanctions imposed on Moscow; a disruption to the supply chain following a rise in Covid-19 cases in China, the manufacturing hub of the world; the increase in the costs of gas due to reduced supply from Russia; and a spike in the demand for gas, which is typical of the summer months.
Last week, after meeting with Powell and Yellen at the Oval Office, the President said that the administration is laser-focused on taming inflation. One measure we are almost certain to see — perhaps multiple times during the upcoming months — is a hike in interest rates, a time-tested tool used by policymakers for curbing inflation.
Many economists such as Larry Summers, who served as the Treasury secretary for President Bill Clinton and the first director of the National Economic Council of President Barack Obama, have argued for the need to raise interest rates substantially.
However, there is an inherent danger: It might lead to a recession. But Summers and other economists point out that high inflation and a low unemployment rate can lead to a recession as well. For the moment, the administration and the Federal Reserve — which is independent of the White House — seem to be resigned to the fact that bringing prices down and slowing the economy is essential.
In another major move, Biden is planning a trip to Saudi Arabia, in an effort to get the kingdom to pump more oil, which will help stabilise gas prices. The Democrats had been a vocal critic of the de facto Saudi leader, Crown Prince Mohammed bin Salman, who many believe was behind the brutal killing of Washington Post columnist Jamal Khashoggi.
While an interest rate hike and an increase in oil production will reduce inflationary pressures, it is unlikely that they will do so soon enough to have an effect on the mid-terms.
Pulitzer Prize-winning economist Paul Krugman makes this point in a recent op-ed for the New York Times in which he observes that “…voters aren’t poised to punish Democrats for underlying inflation; they’re angry about gasoline and food prices which no rational analysis would say are Biden’s fault.” Krugman concludes his piece by advising the Democrats to run on social issues and against the threat the modern GOP poses to democracy and American values.
I concur, and would add that who wins these mid-terms matters not only for the US but for the future of the world economy. A recent United Nations report reduced its projections for global growth from 4% to 3.1%. The International Monetary Fund and the World Bank have similarly slashed their projections. The Biden administration supported by a Democratic majority in the Congress would ensure the US plays a leadership role in bringing the countries of the world together to cooperate in fighting inflation and promoting global growth. A US divided legislatively would push the country toward isolation.
Runaway inflation is a global problem that demands global solutions. Those solutions can only be crafted by those who care about the world and not just themselves or their own little corner of it.