New Inflation Numbers: Still High, Still Fixable

Photo Credit: Getty

July’s inflation numbers are out. The annualized Consumer Price Index came in at 5.4 percent, compared to a 2 percent target. The month-to-month increase was 0.5 percent, an improvement over June’s 0.9 percent. While a return to 1970s stagflation is almost certainly not in the cards, inflation is still too high. Congress and President Biden should act now to keep it in check.

This appears unlikely at the moment. As of this writing, their latest trillion-dollar spending bill is in the process of clearing the Senate, though it will likely face friction and delay in the House. Assuming the bill does pass, it will nudge inflation upwards in future months while doing little to help the economy. Fiscal discipline in Washington is currently about as popular as the plague, but that does not change the need to reduce deficit spending. Economic recovery depends on increasing vaccination rates, not more politically motivated spending.

Politicians also need to respect the Federal Reserve’s independence. Higher interest rates are necessary to keep inflation low—but they also make government debt more expensive. President Biden and other political officials should resist the urge to pressure the Fed to keep rates low, and should spend less instead. Political meddling in central banks is how inflationary debacles like in Argentina happen. While the Fed has its flaws, it can do a good job of keeping inflation low—if it’s allowed to.

 Other price increases have nothing to do with inflation (see my recent post on what inflation is, and what it isn’t). These price increases also deserve attention.

Trade barriers from both the Trump and the Biden administrations are upsetting supply chains. Above and beyond inflation, protectionist trade policies are increasing prices for cars and houses, and are largely responsible for computer chip shortages. Occupational licenses are keeping honest people out of work. Excessive regulations and permit requirements are blocking new ideas and projects that could push product prices down. Financial regulations are keeping capital away from small businesses that could use to it grow and compete against bigger companies. Energy policy restrictions are raising prices across the economy.

It is not enough to do simply do something. It is important to do the right things. Today’s policy mistakes are likely not enough to topple the COVID-19 crisis recovery, but they will slow it down, for no good reason. Fortunately, there are lots of sound policies that can hold down inflation while boosting the COVID recovery. Many of them are in CEI’s most recent Agenda for Congress.