Democrats' Inflation Dilemma: A Test of Market Forces

Strategic Insights -

As the US approaches its midterm elections, high inflation has become a major concern for voters, with standards of living falling due to price increases outpacing wage growth. President Joe Biden has made tackling inflation his top economic priority, but the challenge lies in finding effective solutions. A Morning Consult survey found that over half of voters blame Biden's policies for the inflation crisis, while another poll shows that more voters believe the president has significant control over managing inflation than the Federal Reserve or Congress.

Key Takeaways:

  • The Biden administration's fiscal stimulus is being unwound this year, which will cool demand and contribute to lower inflation.
  • Energy prices, particularly gasoline, are responsible for roughly half of the surge in US inflation, yet no president has the tools to bring them down by election day.
  • The administration's efforts to increase oil supply, such as releasing oil from the Strategic Petroleum Reserve and urging producers to ramp up production, have had limited success.
  • The Democrats' desire to increase alternative energy sources limits incentives to invest in carbon assets, leading to higher oil prices in the long term.
  • The lack of refining capacity due to mothballed refineries during the Covid lockdown means petrol prices will remain high even after oil prices abate.
  • The administration is considering suspending the federal levy on petrol, which could generate higher demand and push prices up.
  • The Biden administration wants to crack down on price gouging by firms in industries with limited competitiveness, but market concentration has been elevated across several US industries for years without sparking inflation.
  • Cutting tariffs on Chinese imports could lower consumer price inflation, but this would require ceding leverage in trade negotiations.

Statistics:

  • Inflation is up 9.1% in June over the past year, with energy prices responsible for roughly half of the surge (Source: Bureau of Labor Statistics)
  • Over half of voters in a Morning Consult survey blame President Biden's policies for the inflation crisis
  • The US is undergoing the second-largest fiscal retrenchment in its history, which will cool demand (Source: San Francisco Fed)
  • Petrol prices are up more than 40% over the past year, with food prices up more than 10% (Source: Bureau of Labor Statistics)
  • The administration's proposal to release over 1mn barrels of oil a day from the Strategic Petroleum Reserve stabilised prices for a time, but has had limited long-term impact (Source: International Energy Agency)
  • The federal levy on petrol is about 18 cents a gallon, not much compared with an average price per gallon of about $4.50

Sources:

  • Morning Consult survey
  • Bureau of Labor Statistics
  • San Francisco Fed study
  • International Energy Agency estimates
  • Peterson Institute study
  • White House analysis
  • Bureau of Labor Statistics
  • Bureau of Labor Statistics
  • San Francisco Fed