About two weeks later, the chair of the House Republican Conference, Rep. Elise Stefanik, went a step further in blaming Democrats, saying in a press conference that “inflation is skyrocketing because of Democrats reckless and wasteful spending” and “this rampant inflation is a result of Democrats reckless tax and spend policies.”
Facts First: While some economists say the stimulus packages passed in response to the Covid-19 pandemic are having an impact on inflation, it’s misleading to suggest that’s the only explanation for the recent rise in inflation. Blaming it exclusively on Democratic spending proposals misrepresents what’s actually been passed, and ignores the trillions of dollars in spending passed last year supported by Republicans and signed by then-President Donald Trump which economists say have also contributed to inflation.
“Inflationary pressures are arising from a variety of factors: supply chain issues, the reopening of the economy, over $2 trillion of excess household savings, accommodative monetary policy, President Trump’s $900 billion December stimulus, and the President’s $1.9 trillion stimulus,” said Michael Strain, Director of Economic Policy Studies for conservative think tank, the American Enterprise Institute.
Jason Furman, the Aetna Professor of the Practice of Economic Policy at Harvard Kennedy School, noted that the stimulus checks included in all three Covid relief packages, not the tax credits in the American Rescue Plan, were likely responsible for any impact on inflation those policies had.
“The tax credit’s relatively small compared to the economy as a whole,” Furman said. “If you want to call the checks a tax policy, yes I think that did contribute to inflation.”
Furman, a Democrat who previously worked for the Obama administration, acknowledged that the American Rescue Plan has contributed somewhat to inflation, but said, “I think the biggest thing that’s contributed to inflation is just restarting an economy,” something other countries recovering from the pandemic have also experienced.
Mark Zandi, chief economist of Moody’s Analytics, told CNN that “The jump in inflation has nothing to do with tax and spending policies.”
According to Zandi, inflation is being temporarily driven by “a one-time adjustment in prices” following a decrease last spring when the pandemic erupted, supply chain constraints which have limited production and an increase in demand as the economy reopens.
“Businesses that slashed prices during the height of the pandemic, such as hotels, airlines, rental car companies, etc. are simply raising prices back to where they were pre-pandemic,” Zandi said, adding that, “the supply-side of the economy has lagged demand as the pandemic continues to struggle with scrambled global supply chains.”
According to Zandi, “All of this will be sorted out in coming months, supply will catch up with demand, and inflation will moderate.”
Federal Reserve Chair Jerome Powell, who was nominated by Trump, also expressed confidence that the rise in inflation is temporary.
Future Inflation
However, economic experts suggest the impact would likely be minimal.
“I think to a first approximation the forward looking proposals would have very little impact on inflation because they’re spread out over time and give the Fed a lot of time to react and are mostly paid for,” Furman said.
Compared to the American Rescue Plan which Garrett Watson, senior policy analyst for the Tax Foundation, said was mostly funded through deficit spending, Biden’s proposed infrastructure plan “would be partially offset by tax increases, which would mitigate the inflationary impact,” Watson told CNN.
“How much this spending would increase inflation depends on two uncertainties: (1) how close the economy is to full capacity over the next few years without the additional spending, and (2) how much additional supply the spending itself generates,” Watson said, adding that the latter is a point White House advisors make to explain why they are not as worried about the plan’s inflationary impact.
According to Furman, the Republican argument that Democrat-supported tax policies will contribute to inflation makes little sense.
“It’s bizarre. The tax changes the Democrats are proposing are tax increases so if anything, you’d think that would reduce inflation,” Furman said. “In general you think tax cuts are inflationary and tax increases are you know deflationary, so I think it’s sort of strange because I think Republicans aren’t trying to accuse Democrats of being big tax cutters but if you think taxes are causing inflation it’s like you’re accusing the Democrats of cutting taxes by too much.”
