Biden makes his bet on inflation

President Biden says he is doing “everything in my power” to bring down inflation. But he is not. What he is actually doing is making a calculated bet that inflation will break without forcing him to abandon some key policy principles.

If he’s right, his grades will improve, along with the Democrats’ chances of electoral success. If he’s wrong, Democrats will likely suffer annihilation in this year’s midterm elections, with a possible recession looming in the second half of Biden’s presidential term.

Inflation rose to 8.5% in March, its highest level in over 40 years. Now everyone knows why. Gasoline prices are up nearly 50% year-over-year, while home energy prices, for heat and electricity, are up 15%. New and used cars are still exceptionally expensive. The races cost 10% more than a year ago. Supply chain issues and turbocharged demand still leave many products in short supply, driving up prices.

Biden is doing, well, something. He authorized the biggest-ever release of oil from the US reserve, starting in May, to bring more supply to market and lower prices. It suspends an air quality rule that usually limits ethanol consumption in the summer, which could lower gas prices in the Midwest by pennies. He also slams energy companies and other big companies for profit, even though there’s little evidence it’s happening and Biden’s reprimand wouldn’t change anything if it did.

Here’s what Biden isn’t doing

There are also some things Biden isn’t doing, as Yahoo Finance has reported over the past two weeks. Biden could consider some of the demands from oil and gas producers for faster approval of infrastructure projects, such as pipelines, needed to move oil and gas from domestic drilling fields to refineries. It could move away from climate reporting rules such as those the Securities and Exchange Commission and other federal agencies want to impose. These types of moves would not automatically bring a flood of new household energy to market. But they could signal to lenders and investors that there will be fewer barriers to long-term energy projects, which would reduce investment costs and, in turn, increase the incentive for domestic drillers to produce.

HOUSTON, TEXAS - APRIL 01: A person pumps gasoline at a Shell gas station on April 01, 2022 in Houston, Texas.  The Biden administration announced on Thursday that the United States would release up to one million barrels of oil a day from the United States' strategic petroleum reserve.  This decision aims to mitigate the impact of rising gas prices in the context of the Russian invasion of Ukraine.  “The magnitude of this release is unprecedented: the world has never had a release of oil reserves at this rate of 1 million per day during this period of time,”;  the White House said.  (Photo by Brandon Bell/Getty Images)

A person pumps gasoline at a Shell gas station on April 1, 2022 in Houston, Texas. The Biden administration announced on Thursday that the United States would release up to one million barrels of oil per day from the United States Strategic Petroleum Reserve. (Photo by Brandon Bell/Getty Images)

The Peterson Institute for International Economics recently published research showing how Biden could reduce the rate of inflation by 1-2 percentage points by lowering or repealing tariffs on imports, including those that Donald Trump imposed on Chinese products in 2018 and 2019. One or two percentage points It might not seem like a lot, but PIIE estimates that it would save a typical family around $800 a year. That’s likely a lot more than oil release or Biden’s ethanol waiver will accomplish.

[Follow Rick Newman on Twitter, sign up for his newsletter or send in your thoughts.]

Biden doesn’t do these kinds of things because they would conflict with other longstanding priorities. Biden clearly does not want too much new oil and gas production as it pushes hard for green energy that will replace fossil fuels. He only wants enough new production to bring prices down to tolerable levels, for a while, so that voters will take a more charitable view of the Democrats who are in charge of government for at least a few more months. Too much oil and gas would perpetuate our dependence on cheap energy and make the transition to green energy more difficult.

Biden seems unlikely to reverse Trump’s China tariffs because they give him some leverage over China in future negotiations related to climate policy, human rights or maritime security. Biden also wants to promote more unionized manufacturing in the United States, and tariffs that make foreign products more expensive are helpful.

Biden’s policies on green energy and domestic manufacturing are inherently inflationary because they depend on eliminating the cheaper alternative in favor of something that may be better – less carbon, more jobs. in the US – but probably not cheaper. Products made in the United States simply cost more than products made in China because labor and regulatory costs in the United States are higher. Biden may be right when he says the widespread availability of green energy will ultimately reduce costs, but we’re a long way from that now.

Instead of using everything in his power to reduce inflation, Biden is taking modest steps on the margins, while betting that inflation will come down on its own. That might sound crazy, given that the White House, Federal Reserve, and many other forecasters got it all wrong last year when they said a surge in inflation would be temporary and not terribly painful.

Inflation could decline

But the turnaround expected by these forecasters may finally be underway. Manufacturing output was surprisingly strong in March and is well above pre-pandemic levels, a sign that COVID-related disruptions and supply chain shortages are finally running their course. Auto manufacturing rose significantly in March as automakers began to bring semiconductor shortages under control. New and used car inflation is still elevated, but has started to decline and will likely continue to decline as comparisons with the high levels of a year ago become more favourable.

Consumers are finally shifting their spending habits towards services, which has taken longer than economists predicted, but it’s a crucial sign that the economy is getting back to normal. Airline bookings are strong, for example, even as soaring jet fuel costs are driving up airfares. People locked up for two years obviously want to get back to traveling and going out. Inflation in the services sector might actually be welcome, as some of these prices, despite having risen sharply over the past year, are still below pre-COVID levels. As consumers spend more on services, they will spend less on goods, and lower demand will reduce inflation on the things that have risen the most over the past two years.

Timing is a huge risk for Biden. Economic conditions around May or June of an election year often determine voters’ choice in November. Inflation could decline significantly by the fall, but could still be uncomfortably high at the start of the summer. Whether Biden is going to do more to fight inflation, he doesn’t have long to make up his mind.

Rick Newman is the author of four books, including “Rebounders: how winners go from failure to success.» Follow him on Twitter: @rickjnewman. You can also send confidential advice.

Follow Yahoo Finance on Twitter, instagram, Youtube, Facebook, Flipboardand LinkedIn

Leave a Comment