Biden Should Fight the Inflation the Fed Ignores

Economists and regular people can never seem to agree about inflation. Looking at last week’s news that U.S. consumer prices rose an eye-popping 4.2% in April from a year ago, a central banker will say that the increase is a much more modest 3% once food and energy costs are stripped out. A normal person will say that doesn’t help very much when they’re trying to fill up the car on the way to the supermarket.

The good news is that the Federal Reserve is deliberately insulated from day-to-day politics. That means Chair Jay Powell can stay the course with his “average inflation targeting” framework, while President Joe Biden and members of Congress can move to address the price issues that are most concerning to regular people: those everyday items that are purchased frequently even if they don’t necessarily add up to a huge share of overall consumer spending.

It’s a healthy division of labor. Both kinds of inflation matter to different people and in different ways, and the central bank and elected government can complement each other’s work in helping Americans climb out of the pandemic economy.

Wisdom stems from recognizing how fundamentally odd the economists’ concept of inflation is.

The idea is to discount price movements in the food and energy sectors because they are prone to violent price swings, but also because these swings are often dominated by “real” rather than monetary factors. Chicken prices are up lately, for example, not because of money-printing but because Tyson Foods apparently made a bad bet on  roosters that don’t perform.

The Fed rightly concentrates on slower-moving changes in big sectors of the economy such as housing, health care and durable goods. But that means it is often focused on prices that are rarely paid.

The cost of buying a used car surged 10% in April, for example, but in any given month few people buy a used car. The single biggest item in the core CPI, the index that made news last week, is the cost of housing. This is calculated by looking at rents, and then imputing an equivalent rental price to the residents of owner-occupied housing. Since most Americans live in owner-occupied housing, this means the biggest component of the price index is a statistical construct that nobody pays.

To be clear, there’s a good reason for this. If you’re trying to steer the entire U.S. economy, you need to pay attention to what matters to it — and housing matters a lot. So do things like the price that Medicare pays to medical-service providers.

A person just living his life, by contrast, cares what he actually pays for stuff. I own my home so don’t care that so-called “shelter inflation” was mild. I have no intention of buying a new car, so I don’t really care that the price of used cars surged. But I buy food and gas every week, so I both notice and care.

Academic studies show that consumer perceptions of inflation tend to be dominated by frequent purchases, which are inconvenient to give up. I decided to put off getting a new fence for my backyard, for example, because lumber prices are soaring. But my family needs to eat every day.

This is the opportunity for Biden. Let Powell stay focused on the long-term health of the labor market. The president can show concern about the price of everyday goods.

Last week, that required addressing the gasoline shortages in the southeast U.S., which the president did in part by waiving some federal fuel blending requirements to keep supply on line. More broadly, Biden should make a bigger effort to frame his energy policy around the goal of cheapness.

Renewable energy and electric cars both cost more up front than fossil fuel and gasoline-powered cars, but they have cheaper long-term operating costs. Meanwhile, current interest rates are low. Biden’s program, by calling for replacing fossil fuels with capital-intensive renewables and batteries, essentially lets the U.S. use debt (which is cheap) to get energy (which is expensive) — a clear financial win even if you don’t care about pollution.

Biden should also look at unwinding the Trump-era U.S.-European tariff war on food products. A bigger issue is the need for agricultural labor.

As it happens, there is a bill that has already passed the House, the Farm Workforce Modernization Act, which would help keep food affordable — especially milk, which normally ranks second only to gasoline as a highly salient price. The bill, cosponsored by the newly powerful Representative Elise Stefanik, would create a pathway to regularize the status of undocumented farmworkers, expand the H-2A visa program and, crucially, make dairies eligible for temporary worker visas.

This is not an anti-inflation program as a central banker would understand it. Which is fine, because the central bank isn’t trying to fight inflation right now. But these are the prices that matter to people’s lives and to politicians’ futures, and there are good ways to keep them from rising too fast.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew Yglesias writes the Slow Boring blog and newsletter. A co-founder of Vox and a former columnist for Slate, he is also host of "The Weeds" podcast and is the author, most recently, of "One Billion Americans."

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