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The Economy Is Still Inflated
Biden-era high prices persist even as the Fed slows the rate of increase. Trump should take note.
By Mickey D. Levy and Michael D. Bordo, WSJ
Dec. 3, 2024 5:20 pm ET
The Federal Reserve has slowed inflation, but many Americans continue to pay a high price for the cumulative inflationary consequences of excessive monetary and fiscal stimulus.
We wrote in these pages in February 2021 that, based on history, high deficits combined with expansive monetary policy would trigger accelerating inflation. Joe Biden’s $1.9 trillion American Rescue Plan was close to being enacted, but we never imagined that the Fed would maintain zero interest rates and continue its massive purchases of assets until March 2022, almost a year after inflation first began to surge. Today’s economy is still suffering from these policy excesses.
There’s a big difference between the rate of inflation, which measures the percentage change in the prices of all goods and services, and the actual price level consumers currently pay, which is the accumulation of past inflation. The Fed focuses its attention on achieving its dual mandate of 2% inflation and maximum employment. Meanwhile, it has no strategy to address the fact that the compounding of past inflation has raised consumer prices dramatically: The consumer-price index is about 22% higher than its pre-pandemic level. This is higher than the 19% rise in the Fed’s favored personal-consumption-expenditure price index, but the latter measure understates the increases in consumers’ out-of-pocket expenses by including items financed by third-party payers, such as Medicare, Medicaid and employer-provided health insurance.
Research by Fed staffers and other economists attributes the high inflation primarily to transitory supply shocks during the pandemic. But supply bottlenecks have now disappeared, and price levels remain well above the level that would be consistent with their pre-pandemic trajectory. It’s clear that excess demand generated by pandemic-era stimulus checks and extended monetary easing contributed significantly to the high inflation. Continued strong demand has led to healthy economic growth that exceeds the Fed’s estimates and sticky inflation that remains above the Fed’s target. Ironically, while the Fed characterizes its monetary policy as restrictive, the Federal Reserve Bank of Chicago’s Financial Conditions Index shows “looser-than-average” financial conditions.
Even as economic growth creates new jobs and workers’ wage gains begin to exceed inflation modestly, many middle- and lower-income earners have fallen behind as higher prices eat up larger shares of their incomes. According to the Bureau of Labor Statistics, the costs of shelter, food and energy are up about 25%, 27% and 25%, respectively, since the onset of the pandemic. The 34% of Americans who re
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