Biden’s Christmas present for Trump: Sticky inflation

President Biden has a Christmas present for President-elect Trump. And it’s not a lump of coal, since Biden has largely regulated that energy source out of existence.

No, Biden’s Christmas present for Trump is “sticky inflation” — a condition where the inflation rate stops falling and may even rise slightly. It’s not something Trump wanted — nor the voting public, judging by the looks of the recent election. But Biden’s big-spending ways have ensured that the nation’s initial progress in inflation reduction is flattening out, keeping inflation rates higher than Federal Reserve Bank officials prefer. Merry Christmas!

The Bureau of Economic Analysis reported Wednesday that the Fed’s preferred inflation gage, the Personal Consumption Expenditures index, ticked up by 0.2 percentage points last month, the second straight month showing a small increase.

To understand why, we need to understand the primary cause of inflation. As economist Milton Friedman once observed, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” When the government is borrowing and spending a lot of money, the quantity of money goes up, which puts upward pressure on inflation. And the government under Biden has been spending a lot of money.

In responding to the economic problems created by the pandemic, Washington cranked up spending in Trump’s last year in office (2020) and Biden’s first year (2021). Those budget deficits rose significantly — $3.1 trillion and $2.8 trillion, respectively — which likely fueled inflation.

But in Trump’s first three years in office, before the pandemic, his deficit spending totaled $2.4 trillion. For Biden’s last three years in office, after the pandemic was subsiding, his total deficit was nearly $5 trillion — twice Trump’s first three years. In other words, Biden barely scaled back government spending even after the pandemic was largely behind us.

A few Democratic economists warned Biden that some of his spending, especially the American Rescue Plan of 2021, would be inflationary. The Biden team dismissed the concerns, even trying to pressure outspoken Democratic economists to shut up.

Indeed, Biden tried to spend even more, such as his student loan forgiveness scheme, which would have cost taxpayers $400 billion. But the U.S. Supreme Court stopped him because the U.S Constitution doesn’t allow a president to ladle out billions of dollars that Congress hasn’t appropriated.

Sadly, it’s not clear that Biden ever understood what caused inflation, or whether he cared, until it appeared it would cost Democrats the presidential election.

Now that he’s on his way out, Biden has been stepping up the spending to get as much taxpayer money out the door before Team Trump comes in and starts trying to restrain, and maybe even claw back, some of those funds. As the Washington Post reports, “Biden and his aides have concluded that … there is one big thing they can do: focus their final weeks on getting billions of dollars out the door to finish implementing Biden’s signature pieces of legislation.” These efforts are likely fueling inflation now and well into the next year.

And you can see that spending it in the money-supply numbers. The money supply peaked in March 2022. Inflation, which usually lags the money supply by a few months, peaked at 9.1 percent in June 2022. As the money supply gradually declined over the next two years, so did inflation. But the money supply began to tick up again this year as Biden tried to “buy” various voters’ support by doling out taxpayer money. Now inflation is ticking up also.

These recent inflation numbers are important, first because the public is fed up with inflation and wants prices to stabilize once again. Second, the Fed will decide in its December meeting whether it will cut interest rates again or, if the members are concerned that inflation is too sticky, hold off lowering interest rates until they see clear signs of inflation decline.

A Fed decision to wait means that consumers will likely be paying more for interest rates and the federal government will have to pay more for its massive borrowing. Trump may get blamed if that sticky inflation carries over into 2025 even if it’s Biden’s fault. Some Christmas presents are just not wanted.

Merrill Matthews is a public policy and political analyst and the co-author of “On the Edge: America Faces the Entitlements Cliff.” Follow him on X@MerrillMatthews

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