US Inflation by Administration

 

We are now within a week of the 2024 Presidential Election. There seems to be a lot of confusion in the American electorate about the state of the Economy and the role (if any) that has been played by prior administrations. In a earlier post (here), I looked at GDP across eight Administrations starting in 1974 (I also explain how to read the graphic above). In this post, I will look at Inflation, specifically the Consumer Price Index (CPI).

There were two major episodes of Inflation since 1974:  (1) The Great Inflation of the late-1970s and early 1980s and (2) the COVID-19 Pandemic Inflation of 2020. Both these historical periods provide fascinating Economic History and provide clues about how the Economic System really works (particularly the Nixon Price Controls and the current debate). Commentators with an axe to grind will argue that inflation is caused by Government Expenditure. For example, the Inflation Reduction Act of 2022 is erroneously argued to have caused the Inflation of 2020, but causation doesn't run backwards in time. 

Without becoming sidetracked in the causes of Inflation (I'll address that elsewhere), the major causes of Inflation in the Modern period are economic Shocks (the first row of the figure above):  

Since 1975, we've had (1) the Vietnam War, (2) the Great Society Programs, (3) the Arab Oil Embargo, and (4) the COVID-19 Pandemic. Everyone reading this lived through the COVID-19 Pandemic and experienced  supply chain disruptions (remember hoarding toilet paper). Any supply shocks will increase prices--that's simple ECON 101. Aggregate Demand shocks can also increase inflation, but the effects pale by comparison. 

It's inevitable that the current administration (Carter in the late-1970s and Trump in 2020) gets blamed for everything that happens on their watch. Except for botched or nonexistent attempt at Price Controls (they were used effectively during WWII), the shocks that hit the Economic System and resulted in Inflation had external causes. It is really the Political System's response or poor memory of cause-and-effect that has led to a bad taste in Voter's mouths.

In any event, the COVID-19 Pandemic Inflation is over, the  Inflation Reduction Act of 2022 has not created permanent increases in the CPI and the Atlanta Fed Economy Now App (you can get it on your cell phone and the forecasting approach is similar to the one I use) also predicts declining Inflation.

My take on the current Inflation episode is that the Political System missed an opportunity to implement a reasonable, possibly temporary, regime of Price Controls. For example, the Kroger-Albertson's Supermarket Merger  which was blocked by the Federal Trade Commission (FTC) could have been used to exert some control over Food Prices. As a condition of the merger, the new company would have been required to accept Price Gouging laws. Food Price Inflation has been major complaint of consumers. Capping price increases at Kroger-Albertson's would have been a major stimulus to their business. Blindly following Neoliberal Free-Market principles has prevented the US from responding to Inflation. Voters should be concerned about failures in the Political System.