Biden has few tools to curb inflation in the short term

President Joe Biden promised to make every effort to lower prices in USA and his secretary of the Treasury, Janet Yellen, said the removal of tariffs on Chinese products could help.

But the government actually has few tools to curb the increase in the inflation rate in the short term.

The rise in prices is directly linked to the economic reactivation after the 2020 recession that caused a gap between supply and demand, and a shortage of labor.

As a result, in October, prices increased 6.2% compared to the same month in 2020 according to official data, something never seen in 30 years.

Interest rate hike

Raising interest rates sharply to contain inflation could be an effective measure, but politically very unpopular because it raises the cost of credit.

Furthermore, it is a prerogative of the central bank, which is autonomous.

The move is risky as the job market has not yet reached its pre-crisis levels.

“There is not much that the government can do on its own to solve the current inflation problem, apart from trying to convince the ports, the logistics companies, to increase their capacity” to work to supply the demand, said Andrew. Hunter, an economist at Capital Economics.

The only “key” parameter over which the federal administration has “partial control, with Congress, is budget policy,” he said.

“But that is not an easy solution” because it would mean a sharp contraction in demand, for example increasing taxes or lowering spending, he explained.

The president’s top economic adviser, Brian Deese, said Sunday that Biden’s economic plans would have a positive impact on prices.

The program for US $ 1.2 billion in infrastructure, which the president will sign on Monday, “will help to circulate goods more freely and at a lower cost,” he argued on NBC.

But “the problem is that such policies generally take years to have an impact on the potential supply of the economy,” said Andrew Hunter.

Not only will these plans, including one for social and environmental spending worth US $ 1.75 trillion being discussed in Congress, “will not contain inflation now” but could “increase it further if they translate into a new short-term budget expansion that stimulate demand ”, explained the expert.

Punitive tariffs, strategic reserves

Tariffs imposed by the Donald Trump administration on Chinese goods worth $ 370 billion in merchandise remain in effect.

Yellen estimated on CBS Sunday that removing these tariffs “would make a difference” on inflation.

It is debatable, according to Hunter, who highlighted that by imposing them in 2018-2019, the price increase was limited, and was offset by fluctuations in exchange rates, companies that reduced margins, and imports from other countries such as Vietnam or South Korea.

Senate Democratic Chief Chuck Schumer on Sunday called for using strategic oil reserves to lower gasoline prices.

But, in a context of promises to fight against climate change, the White House is considering the opportunity to use this instrument, whose impact is also temporary.