Why Was Inflation So High? Was it Biden’s fault?
An Explainer
[You can download and print a one-page PDF of this explainer here.]
Inflation is a complicated issue, and anyone who says otherwise is probably not being 100% honest. I am not here to give you an easy answer. My goal is to try and explain what happened since 2020 honestly and fairly.
First, it’s important to remember Presidents and political parties don’t really have direct control over inflation (in the U.S., the Federal Reserve is more important). Still here are a few important facts about the Biden/Harris administration:
created in the U.S. Unemployment is around 4%, a very good number.
Under Biden/Harris, wages are up a cumulative 19.4% for workers.
Overall economic growth has been solid (6% GDP), and the U.S. economy has recovered from the pandemic in a much better position than Europe.
We should also acknowledge the bad news: under Biden/Harris,
Inflation has been up a cumulative 19.2%. The current rate of inflation is down to 2.4%.
How did we get here?
1. Remember 2020-2022. During the pandemic, there was a slowdown in the economy, and then a rapid bounce-back period. This pattern happened around the world.
2. 2022-2023. The U.S. economy bounced back very quickly, with lots of new jobs created, and wages going up. (Lots of jobs and high wages sounds like a good thing, but unfortunately, it can add to inflation!) The fact that the government helped in the form of stimulus (and there were big stimulus packages passed by both Trump AND Biden) as well as big, ambitious projects in the Inflation Reduction Act, probably helped the U.S. recover faster.
Supply chain problems. During this period, there were still supply shortages for goods, including important and expensive items like cars and car parts. Oil-producing countries like Saudi Arabia and Russia also cut back on oil production in 2020 when Trump was president, leading to a rise in prices once the economy started to recover.
3. 2023-2024. Rate hikes. The best tool the U.S. government has for combating inflation is interest rate hikes. These are directed by the Federal Reserve, not the President. The Fed started raising rates from close to 0% at the start of the pandemic, all the way up to 5.33% by August 2024. These rate hikes slow down economic growth, which keeps inflation in check.
Unfortunately, higher rates don’t help across the board. For one thing, higher rates lead to higher effective real estate prices and rents, which means that for many people the cost of owning or renting a home has gone up a lot in recent years.
What happens next? The mythical “Soft Landing”
In past years, when the Federal Reserve raised rates to slow inflation, what usually followed was an economic recession (this happened in the 1970s, again in the 1980s, and yet again with the “great recession” of 2009-2010). There were worries that a recession might happen again in 2023-2024, but happily, we haven’t seen that. Corporate earnings remain good, hiring remains strong, and yet inflation has continued to drift downwards. This is referred to as a “soft landing,” and it seems like the U.S. has been able to achieve it for the first time in 30 years.
If you want to see more data, there is a fair breakdown of the Trump economy vs. the Biden economy on the right:
If you want a comparison of the U.S. economic recovery against Europe’s, there’s a detailed study of that on the left.
Takeaway: European countries have had slower growth but also higher inflation rates than the U.S. since the pandemic. We’re doing something right!
Meanwhile, what does Donald Trump want to do if he wins the 2024 election?
The #1 economic policy Donald Trump has been talking about are across-the-board tariffs. (A “tariff” is a tax on imported goods.) He wants to put in 60% across-the-board tariffs on goods from China, and 10-20% tariffs on all other imported goods. All professional economists say this would cause a huge spike in inflation! More on the right. Donald Trump’s approach to economics is very simplistic. He doesn’t understand that we live in a complex, global economy. If enacted, these tarifs would probably cause a severe recession.