Inflation is both a financial and psychological issue, particularly for older people who experienced the "double-digit inflation" of the early 1980s, and the tough monetary policy that drove up interest rates to near 20%. They recall how inflation crushed the markets for long-lived assets like cars and houses and squeezed savings, wages, and living standards. The recently reported annualized inflation rate of 6.8%, well above the Federal Reserve target of 2%, provides rueful reminders of those high-inflation years, threatening to erode public support for spending on Joe Biden's initiatives. Initially, it was hoped that this rate of inflation would be transitory, i.e., at least partially self-correcting, but increasingly it looks more permanent and dangerously upward spiraling, prompting Fed chair Jerome Powell to announce a plan to rein in inflation by raising interest rates beginning in March, although in a far less draconian pattern than was imposed in the 1980s.
Meanwhile, Republicans see this as an opportunity to gain seats in Congress and the White House in 2024. Senator Rick Scott of Florida proclaimed, "We're going to continue to have inflation. And then interest rates will go up. This is a goldmine for us."
COVID AND TODAY'S INFLATION ARE LINKED
The linkages between the ravages of Covid and the performance of the economy are by now familiar. Workers feared unsafe working conditions. Understaffed businesses reduced hours and some closed, temporarily for some, permanently for others. Meanwhile, consumer preferences shifted from services to goods, increasing the pressure on already-bottlenecked ports, freight rail and long-haul trucking. All of these factors raised costs which were passed on in the price level.
Fortunately, the supply chain blockages that developed due to Covid are being moderated by policy. Extended hours of operation in the major ports of Savannah, Long Beach, and Los Angeles as well as enhanced fees and bonuses for on-time delivery seem to be loosening up the blockages. Worldwide, however, the pandemic continues to slow manufacturing and freight operations, further affecting global price levels.
The strategic republicans will find a "goldmine" in any negative factor they can associate with President Biden. In response, Democrats can point out that inflation is only one indicator of economic performance. Other major measures are unemployment, wage growth, unemployment and wage growth among minority groups, child poverty, food insecurity, job insecurity, and many others, all improving during 2021. Growth of the economy during 2021 was 5.7%, the highest rate since 1984. Most strikingly, nearly 6 million jobs have been added during that time, a record for the first year of a presidential term, accompanied by the fall in the unemployment rate to 3.9%.
Because inflation and covid are linked, Republicans could better serve the nation by admitting that the evidence is in; vaccines and masking work. Moreover, as NPR reported recently, for example, counties that voted most heavily for Trump in 2020 have 5.5 times more deaths per 100,000 from Covid than did counties that voted most heavily for Biden. To save lives, and reduce economic uncertainty, all leaders should promote the Covid-fighting measures that the scientists tell us will help get and keep the pandemic under greater control.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.