Posted on Nov 21, 2021, 12:38 PM
Inflation in the United States jumped in October, reaching 6.2% over one year. To stop it, Joe Biden can activate a palette of tools. However, with different time horizons and no guarantee of success.
Weigh on fuel prices
The price would still make a Frenchman dream: at $ 3.40 per gallon (about 80 euro cents per liter), American gasoline remains half the price of France. But prices are up 35% from early 2020, according to figures from the US Energy Information Agency (EIA). “In the short term, the only lever that can have an impact on inflation are energy prices, by playing on strategic reserves and by forcing companies to calm down with the threat of investigations,” said Thomas Philippon, professor of finance at New York University. In mid-November, the White House thus made public a letter addressed to the FTC, the competition regulator, to put pressure on the oil groups. Failing to be able to influence the decisions of OPEC, some also anticipate a drop in strategic oil stocks (SRP).
To ease prices, the administration could also relax the obligation to include green fuels in refined products, but the measure would be frowned upon by farmers, who make it an outlet. The US shale oil producers could in theory also produce more. But, heavily in debt, many have made profitability their priority, limiting investments in new wells. These measures would also be incompatible with the stated objective of the Biden administration to fight against CO2 emissions.
· Control companies more
The White House launched a vast project this summer to restore competition to the American economy. A decree thus strengthens the powers of federal agencies to control the behavior of companies in several sectors deemed to be priorities, including internet service providers, health and agriculture.
The administration also wants to promote competition in financial services, in particular by ensuring consumers the portability of their data. It also provides more broadly for increased control of business takeovers, to limit the concentration of players. So many measures that could ease prices, but with a medium-term perspective.
Reduce customs duties
Joe Biden has maintained the tariffs imposed by Donald Trump on Chinese products. US taxes on Chinese exports thus reach 19.3%, when they were only 3.1% in 2018, according to data from the Peterson Institute. And the scope is wide, with two-thirds of Chinese exports subject to U.S. tariffs, when they only applied to line thickness three years ago.
Reducing them, however, was not on the menu of discussions between Joe Biden and Xi Jinping at their virtual summit in mid-November. The political stake is in fact broader than just controlling American prices. “For industrial inputs, it would take time before this is reflected in prices, and the impact would not necessarily be visible on the goods to which people pay attention”, further relativizes Thomas Philippon. Only an opening on certain products was made by the sales representative Katherine Tai, with now possible exemptions.
Discuss monetary policy
If the Federal Reserve is independent, economists fuel the debate on US monetary policy. Former chief economist of the IMF, Olivier Blanchard warned about the overheating of budgetary plans at the beginning of the year, and he calls today to project oneself on the next debates. “Financial markets appear to be completely relaxed, with real 5-year interest rates approaching -2%. I don’t think they should be. The lessons of history that we should be looking at now are episodes of disinflation, ”he wrote in a note from the Peterson Institute.
The most famous dates back to the late 1970s, when former Fed boss Paul Volcker calmed soaring inflation, but at the cost of a recession. “How would a sharp and largely unforeseen rate hike affect not only the economy, but also the financial system and the outlook for emerging markets?” This is what we must think about, ”continues Olivier Blanchard. Jason Furman, professor at Harvard and contributor to PIIE, has also called in recent days for a less expansionary policy.
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