Inflation is close to its long-term 2 percent range, so the Federal Reserve
has accomplished its goal of stabilizing prices. Yet the election results show
that rising prices since the COVID-19 pandemic most panicked voters; even more
than the border crossings, or abortion restrictions, and jobs.
So it’s difficult to say whether voters ignored basic economic principles, or
ideologies triumphed common sense, so that many voters needed to blame someone
for their anxieties and wanted to “throw out the bums” they believed caused
it.
It is how democracies work. This reaction happened in most of the developed
world where ruling majorities were blamed for the effects of the pandemic that
damaged their economies.
But in the U.S. it was too much prosperity, not too little. The Bidenomics’
bills pumped an enormous amount of investments into our economy to build a
larger industrial base, modernize our infrastructure and moderate the global
warming.
And many voters didn’t seem to understand how it affected the most basic law
of economics: the Law of Supply and Demand. It postulates that prices rise when
there isn’t enough of something consumers want, and they fall when there is a
surplus.
Only now has the supply of goods and services caught up with demand, which is
why consumers continued to buy as prices rose, because the U.S. economy is fully
employed and consumers weren’t worried about losing their jobs. The historically
low number of workers applying for jobless benefits confirms this.
Yet voters were still unhappy. Everyone had a job that wanted one, yet wages
for many weren’t rising as fast as the cost of everything since the pandemic.
Why? Because it took several years for the supply chains to recover, which
meant the Federal Reserve had to raise interest rates to stabilize prices,
making things even more expensive.
What can’t happen, however is for most prices to return to levels before the
pandemic unless there is another recession—except for energy prices (gas,
natural gas, electricity) because they can fluctuate wildly even in normal
times. So energy prices have returned to more normal levels. Average gas prices,
for instance, have returned to pre-pandemic levels.
Consumer prices rose enough in October to keep the rate of inflation slightly
above the Federal Reserve’s 2 percent goal, The consumer price index (CPI)
climbed 0.2 percent for the fourth month in a row, the government said
Wednesday, matching economists’ forecast. It rose 2.6 percent in a year from
September’s 2.4 percent inflation rate, marking the first upturn in seven
months.
This could be problem, especially if some Republican priorities are enacted,
such a more tax cuts, which might cause the Fed to hold off cutting interest
rates further. It would probably hurt both stock and bond prices, for starters,
and slow growth further in what is already a slowing economy.
On a more cheerful note, now that prices stabilized, the natural rise of
wages will catch up with those newly stabilized prices and most of us will feel
reassured—unless there’s another economic shock.
That could be a larger war, or a climate disaster. Americans are already
experiencing a greater frequency of such shocks with more tornadoes, hurricanes,
wildfires and floods. So newly elected congress men and women, please, please,
don’t cut the funding of the Environmental Protection Agency, or FEMA!
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
