Joe Biden was not at fault for inflation
What caused the 8% rise (from 1% to 9%) in U.S. inflation in 2021–2022? Did Biden’s government spending overheat the economy, causing the 8% rise?Was the inflation rise Biden’s fault, as his critics keep claiming, with the implication that his policies risk inflation rising again?
No. If inflation had risen much less than 8% in Europe and most other countries, the answer would be something specific to the U.S. But inflation also rose about 8% (rising from 1% to 9%) in Europe. The rise in inflation was worldwide.
The reasons
Two things occurred in all the countries where inflation rose sharply: large cost increases from severe covid supply chain disruptions, and large cost increases from a huge rise in the world price of oil. These two large cost increases forced businesses to raise prices a lot.
The world price of oil went from $33 per barrel in May 2020 to $113 per barrel in May 2022 (U.S. Energy Information Administration). The price of a gallon of U.S. regular gasoline rose from $2.00 to $4.50.
This rise in the price of oil raised the price of food at supermarkets because food production uses gasoline or diesel to power farm vehicles to plant and harvest crops and to transport food in trucks to supermarkets. The cost push from this huge rise in the cost of oil caused part of the 8% rise in consumer price inflation.
But didn’t the economies of most countries become overheated from excess demand for goods due to a rise in government spending? No. In Europe, despite some rise in government spending, unemployment stayed high — above 6.5% — in 2021-2022, so there was no overheating. Yet Europe had the same 8% rise in inflation as the U.S.
How did Europe, without an overheated economy, still have an 8% rise in inflation? I estimate that 5% of the 8% came from the two things above — cost increases from supply chain disruptions and cost increases from the spike in the cost of oil. These forced Europe’s businesses to raise price increases 5% to cover their costs.
In response to higher price increases, Europe’s workers pushed harder for higher wage increases, and European data show 2% higher wage increases which forced businesses to raise price increases an additional 2% above the 5%.
These cost increases caused businesses to raise price increases 7% higher, causing a 7% rise in inflation. The remaining 1% was caused by a big hike in the price of natural gas that Europeans had to pay to Russian and domestic suppliers. Hence, Europe’s inflation rose 8%.
American inflation
The U.S. faced the same covid supply chain disruptions and world oil price hikes (5%), and the same harder push from workers for wage increases (2%) as Europe, but not a big hike in the price of natural gas because the U.S. doesn’t depend on Russian natural gas. It is therefore likely that these cost increases — supply chain, oil and wage push — caused a 7% rise in U.S. inflation.
What caused the additional 1% to make U.S. inflation rise 8% instead of 7%? A rise in government spending in 2020–2021 cut the unemployment rate to 4%. In 2019, unemployment was 3.7% but inflation didn’t rise. But in 1921, the government spending raised the job vacancy rate and that caused a slight overheating of the economy that probably raised inflation 1%.
Thus in 2021–2022 Europe and the U.S. had the same 8% rise in inflation (again, rising from 1% to 9%). In Europe the entire rise was caused by cost increases and none by a rise in government spending, because the unemployment rate stayed high (above 6.5%). In the U.S. 7% of the 8% rise was caused by cost increases and 1% by Biden’s government spending raising the job vacancy rate.
Thus, almost all of the rise in inflation (7% out of 8%) was not Biden’s fault.