September’s Consumer Price Index (CPI) inflation numbers came out this morning, and they aren’t pretty. The month-to-month increase was 0.4 percent, after rising just 0.1 percent in July and August combined. The more accurate Core CPI, which excludes volatile food and energy prices, is up even more, at 0.6 percent for the second consecutive month. Over the last 12 months, overall CPI is up 8.2 percent, and Core CPI is up 6.6 percent.
This is the final CPI reading before the midterm elections, so there will be a lot of chatter about its political significance. There shouldn’t be. Inflation is not a Republican-Democrat issue. It is a money supply issue. Politicians have little control over it, no matter what they say.
We have high inflation because the Federal Reserve overreacted to COVID. They increased the money supply by 40 percent over two years when the pandemic hit, while real output only went up by about 4 percent. That massive imbalance changed the price level. That’s why it takes more dollars than it did two years ago to buy the same amount of goods. Their exchange rate is different now.
The Fed began walking back its mistakes earlier this year. These things have lag times ranging from six months to a year and a half, so we are only now entering the window where that might be having any noticeable effect. The best-case scenario is that inflation goes back to normal levels next year.
There is little that either Congress or President Biden can do to help, regardless of who controls Congress.
If anything, Congress and President Biden have made the Fed’s job more difficult by passing round after round of trillion-dollar spending bills that often had little to do with fighting COVID. Most recently, the Inflation Reduction Act has little with fighting inflation, and then was canceled out by a student loan forgiveness proposal targeted at likely voters.
There is little difference between Democrats and Republicans on spending, or on other issues such as industrial policy, trade protectionism, and antitrust activism. If party control of Congress changes, little else will, as far as spending and inflation are concerned.
Whoever ends up controlling the federal purse, they should let the Fed get the money supply back in sync with real output without any more massive spending bills.
They can also help real output grow faster by removing trade barriers such as tariffs and the Jones Act. They can smooth labor market frictions by reforming occupational licensing regulations and respecting workers’ rights to be independent contractors if they choose. They can speed up infrastructure projects by loosening burdensome permit and zoning regulations and letting more energy projects of all kinds move forward.