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Hammered by critics who blame his policies for inflation, president Joe Biden lately has emphasized one way to help bring prices down: cut the annual federal budget deficit.
That is “one easy way to ease inflationary pressures in an economy,” he has said in several recent statements.
The budget, which soared past $1 trillion during Donald Trump’s administration even before the COVID War began, fell by $350 billion during Biden’s first year in office and is expected to shrink by $1 trillion by the end of this October when the federal budget year ends.
However, the reductions are not due to policies Biden and the Congress enacted.
Instead, they will result from a combination of higher tax receipts following the end of the COVID War and the end of federal COVID-era support programs, particularly the U.S. Federal Reserve’s monthly $120 billion in bond purchases.
“It’s probably not something they should be taking credit for,” Dan White, director of Moody’s Analytics office of fiscal policy research, told The Wall Street Journal.
The end of the temporary COVID-related disruptions are not necessarily long-term improvements, White said, but mostly they are “not making things worse.”
Moody’s projects inflation to be about a point lower this year than it would have been had the emergency programs continued.
However, “there’s no simple-minded deficit-to-inflation link,” Glenn Howard, George W. Bush’s chair of the Council of Economic Advisors, said in a WSJ interview.
“You have to look at both the demand and supply sides of the economy,” he explained. “If demand grows much faster than supply, you have inflation.”
Consumer demand surged as the COVID infestation waned; supply chains were not able to respond rapidly, leading to a protracted shortage of goods that has now been worsened by the Ukraine war, Western sanctions, and China’s renewed COVID-related lockdowns.
“Fiscal policy”—which includes managing budget deficits—“shouldn’t be your main inflation-fighting tool,” policy analyst Louise Scheiner at the Brookings Institution said to the WSJ. “On inflation, it’s mostly up to the Fed.”
TREND FORECAST: We have repeatedly pointed out that Western sanctions against Russia are having an immediate impact on inflation. If Biden’s top priority were to reduce inflation, he would lead the allies in easing sanctions.
However, that is not a card that will be played by the military-industrial-complex. We forecast the Ukraine War will continue to rage until Russia gets what it wants.
Therefore, Biden will continue to talk about his efforts to battle inflation while relying on the Fed, U.S. consumers, and global market forces to do the heavy lifting.