Will the Inflation Reduction Act actually reduce inflation? Seems doubtful. There's much to like in it, but . . . — The South Dakota Standard – The South Dakota Standard
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I think Biden’s big bill, dubbed the Inflation Reduction Act of 2022, that just passed and is being hailed as a major political win for the Biden administration is a good one but wish that its branding wasn’t so inflation-specific. I get the political value of the title, but really, controlling inflation has never been something that comes from government fiat or government fiscal policies.
The only thing that seems to work is monetary policy (as was shown by Paul Volcker, above, who was the Fed Chairman in 1981 and had the right stuff when it came to wringing inflation out of our system – more on that later) which is directed by the Federal Reserve Board independently of the White House and Congress. The Fed is doing a responsible job of trying to get this latest bout of inflation under control, with all of us hoping that the small downside move in price increases that we saw last month is the beginning of a trend.
As to the Inflation Reduction Act’s prospects for curbing the upward price spiral? I’m skeptical.
I remember the last serious bout of inflation that occurred during the 1970s, when we hit double-digit inflation by the end of that decade. Then President Nixon early on, in 1971, tried to head off the trend by imposing, for the first and only time in U.S. history, wage and price controls. Nixon’s efforts were in vain as inflation continued to march upward through the decade.
Nixon’s successor Gerald Ford didn’t do much in the way of setting anti-inflation policy, but got some headlines with his “Whip Inflation Now” initiative, which basically was a public relations effort aimed at getting businesses to voluntarily refrain from raising prices and persuading Americans to reduce consumption.
Ford’s efforts flopped. Inflation, fueled to a large extent by the price hikes forced on oil consumers via the OPEC cartel, got to 14% by 1980. By then Ford’s successor President Carter saw his term in office undone by Ronald Reagan, who won a historic landslide vote as Americans, by a huge margin, demonstrated that we were ready for a change in Washington.
Ironically, as it turned out, Carter was somewhat vindicated. He appointed Paul Volcker Chairman of the Federal Reserve Board. Volcker, whose term carried over into the Reagan administration, showed the way when it comes to attacking inflation with money tightening policies. Demonstrating that the only realistic way of tamping down inflation is by reducing demand for money by way of raising interest rates, Volcker’s determined approach took the cost of money to unprecedented levels, with the benchmark federal funds rate reaching an astounding 22% in 1981. For some context, that rate is around 2.5% now.
Did Volcker’s gambit work? You bet it did. By 1982 the inflation rate fell to 6%. By 1983 it was down to 3%. On the trading floor of the Chicago Board Options Exchange, where I was making markets at the time, the subsequent run-up in stock prices – a bull market that lasted for several years – was commonly called “the Reagan rally.”
I always thought it should have been called “the Volcker rally” because what three presidents over a decade couldn’t accomplish, the Federal Reserve Board could … and did so in less than two years.
See why I’m dubious about the Inflation Reduction Act’s likelihood of making a significant dent in the current price run-up? And it isn’t just me. In its summary of the bill, Investopedia notes that the Congressional Budget Office “sees little or no impact on inflation this year.” The Investopedia piece also cites the Wharton School of Business, which concludes that the bill’s impact on inflation will be “statistically indistinguishable from zero.”
The more likely scenario for some inflation relief is a combination of the money tightening program being undertaken by the Fed and a correction of the externalities that created the imbalance between demand and supplies in the first place.
The supply chain debacle seems to be easing these days, so goods are getting easier to obtain, meaning scarcity is likely to be less of a factor in the marketplace.
More visibly, oil prices have come down significantly in recent weeks, in my view due to the fact that oil supplies from Russia, which were boycotted early on during its war with Ukraine, are finding an outlet to markets in Asia, thereby adding significantly to world oil inventories. Oil traders for months were concerned about Russian products being bottled up by boycotts and embargoes, prompting them to run the crude oil markets to the high levels they reached last Spring. But as it turned out, Russian production this year is far higher than expected according to the International Energy Agency, so the oil markets have retreated in recent weeks.
Of course the ironic aspect to this is the fact that Russian supplies were expected to be significantly cut short by President Biden-led embargoes on Russian goods. Having found outlets in Asia, the surprising surge in Russian oil supplies have driven down prices, which have probably had a beneficial effect on, yes, President Biden’s political fortunes here at home. Some guys are just plain lucky.
And it’s not just about oil.
Biden will probably get some public relations help from the fact that overall commodity prices have been trending downward for the past several months. A broad index of agricultural goods and raw materials has fallen about 12% since peaking last May. With respect to grains, a resumption of corn and wheat exports from recently opened ports in Ukraine probably has something to do with the falloff in prices. Overall, the slide in commodity prices should at some point take the upward pressure off producer prices, another closely followed index of inflationary trends.
Could all of this inflation easing reverse itself and turn back upward on a dime? Of course it could if a geo-political upheaval messes things up the way the Russian-Ukraine war did. But based on expectations for general supply/demand fundamentals that are out there now, the trade doesn’t see a sharp run-up on the horizon.
So far, at least, the trend is our friend. More specifically, it is definitely Joe Biden’s friend.
Kudos to the prez on getting this “inflation reduction” legislation passed, and a tip of the hat to his public relations staff for coming up with a title that, misapplied as I think it is, will probably do him some good.
John Tsitrian is a businessman and writer from the Black Hills. He was a weekly columnist for the Rapid City Journal for twenty years. His articles and commentary have also appeared in The Los Angeles Times, The Denver Post and The Omaha World-Herald. Tsitrian served in the Marines for three years (1966-69), including a 13-month tour of duty as a radioman inVietnam.
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