This Isn’t Putin’s Inflation

The price rises began long before Russia invaded Ukraine and will be hard to stop

WSJ editorial. 

"White House aides were out in force on Monday warning that Tuesday’s inflation report would be ugly and blaming it on Vladimir Putin. No doubt that beats blaming your own policies. But inflation didn’t wait to appear until the Ukraine invasion, and by now it will be hard to reduce.

The White House was right about the consumer-price index, which rose 1.2% in March, the highest monthly rise since the current inflation set in. The price rise in the last 12 months hit 8.5%, the fastest rate in 40 years.

Energy prices in the month contributed heavily to the increase, and some of that owes to the ructions in oil markets since the invasion. But so-called core prices, excluding food and energy, rose 6.5% over the last 12 months. Service prices excluding energy, which weren’t supposed to be affected by supply-chain disruptions, were up 0.6% for the month and 4.7% over 12 months.

The nearby chart shows that the inflation trend began in earnest a year ago at the onset of the Biden Presidency. It has accelerated for most of the last 12 months. That’s long before Mr. Putin decided to invade. The timing reflects too much money chasing too few goods, owing mainly to the combination of vast federal spending and easy monetary policy.

President Trump signed onto an unnecessary $900 billion Covid relief bill in December 2020, and Democrats threw kerosene on the kindling with another $1.9 trillion in March 2021. The Federal Reserve continues to support negative real interest rates nearly two years after the pandemic recession ended. This inflation was made in Washington, D.C.

Markets on Tuesday took the bad inflation report in stride, perhaps because they had (like the White House) already discounted the news. Or perhaps investors think the March report represents inflation’s peak. Oil prices may not keep rising, and the report did include some good news on used car and truck prices (down 3.8% in the month).

Still, the overall price news is terrible for American workers and consumers. The March surge means that real wages fell 0.8%, or a decline of 2.7% in the last year. (See the nearby chart.) Real average weekly earnings fell a striking $4.26 in March alone, and they’ve fallen nearly $18 during the Biden Presidency. If you want to know why Americans are sour about the economy even as jobs are plentiful, this is it. Their real wages are falling while the prices of everyday goods and services are rising fast. The average worker Democrats invoke when they demand more federal spending is getting crushed by the inflationary consequences of too much federal spending.

The inflation surge calls for a policy shift to tighter money and less spending that fuels excess demand. The Fed is now on the case, raising interest rates and starting to shrink its bloated $9 trillion balance sheet. Its task would be easier had it begun a year ago. Now it will have to move faster in an economy that is still growing, but with less business and consumer confidence.

Even core inflation of 6.5% is more than three times the Fed’s target rate of 2%. The Fed’s consensus target at its March meeting for a fed funds interest-rate peak of 2.8% in 2023 looks inadequate. History suggests that once inflation is this high, interest rates will have to exceed the inflation rate to break it.

That will run the risk of recession. The Fed’s anti-inflation resolve will be tested if growth ebbs and financial troubles erupt. Any central banker can cut interest rates. The Paul Volcker test of monetary mettle is raising rates when the political class is screaming at you.

As for the Biden Administration and Congress, the best anti-inflation policy would be a spending freeze on everything but defense. Cut tariffs, which would be a one-time price cut. Put a moratorium on new regulation that raises costs for business.

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This advice conflicts with the Democrats’ Build Back Better agenda. But their inflation responses to date of allowing more ethanol fuel (see nearby) and releasing oil from the Strategic Petroleum Reserve are futile gestures. Republicans could pick up the spending freeze and moratorium for their election agenda.

Inflation is a powerful political force because it can’t be explained away. Nearly every voter feels it every day. If the November elections are a referendum on the cost of living, voters won’t blame the Kremlin. They’ll blame the party in power in Washington."