The reported inflation rate for May revealed an annual increase of 4%, prompting a misleading tweet from the White House claiming that “inflation has fallen by more than half.” In reality, inflation is not decreasing but rather continuing to rise, albeit at a slower pace that falls short of the necessary improvement.
Inflation operates similarly to compound interest, as it accumulates over time. While May’s annual inflation rate stood at 4%, it should be noted that this figure is on top of the 8.6% annual rate recorded in May of the previous year. Consequently, over the past two years, inflation has surged by nearly 13%. The assertion made by the White House tweet, suggesting that this provides families with significant relief, is clearly unfounded.
It is imperative to examine the effectiveness of the Biden administration’s economic plans in addressing inflation. Has inflation truly “fallen”? The following chart illustrates the cumulative impact of inflation during President Biden’s tenure compared to other presidents in the 21st century.
Even if the rate of inflation remained flat, at 0%, for the remainder of President Biden’s term, the cumulative effect of his extensive government spending thus far would still make him the leader in inflation among presidents in this century.
However, President Biden himself touted the 4% increase in the inflation rate as evidence that his efforts to reduce the cost of living and sustain stable economic growth are effective. This claim is also far from accurate. Biden’s economic policies have had minimal influence on the slowdown of the annual inflation rate to 4% in May. On the contrary, his policies have consistently exacerbated inflation. The rate of inflation decelerated due to the Federal Reserve’s drastic measures to curb it.
The Federal Reserve has implemented a rapid series of interest rate increases over the past 15 months, transitioning from near-zero rates at the start of President Biden’s term to the current range of 5%-5.25%. These rate hikes were necessary to address the inflationary effects caused by Biden’s expansive government spending initiatives, particularly starting with the American Rescue Plan in March 2021, ironically named as such.
The significant impact of the Federal Reserve’s interest rate increases is evident in the occurrence of three of the largest bank failures in U.S. history. This has undermined the stability of the entire banking sector, placing the economy on the brink of collapse and requiring federal intervention.
Furthermore, the surge in interest rates has adversely affected the residential real estate market, leading to a decline in the value of homes for working Americans and making it increasingly challenging to purchase a home even at reduced prices. It has also resulted in a sharp decline in business optimism, reaching its lowest level in a decade, as acquiring loans for starting or operating a business has become costly and arduous.
While the Federal Reserve’s interest rate surge aimed to slow the pace of inflation, it has not been sufficient, and this is a cause for concern. Although the current inflation rate of 4% is lower than the 9.1% rate recorded last June, it still exceeds the Federal Reserve’s target rate of 2% (a target reaffirmed by the Fed in May). Consequently, additional actions by the Federal Reserve are likely to be necessary.
During its recent meeting, the Federal Reserve paused its streak of 10 consecutive interest rate increases. However, it is expected to raise rates two more times within this year and anticipates a new target range of 5.5%-5.75%.
This clear signal from the Fed indicates ongoing concerns about the persistence of inflation and suggests that further economic challenges are needed to slow down the economy and regain control over price increases. In this scenario, the only aspect of Biden’s economic plans deserving acknowledgment is the economic pain we are currently experiencing and the additional hardships that will accompany future rate increases.