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1. A Tough Opponent for Trump: Inflation

Author:
Matteo Bursi
Publication Date:
01-2025
Content Type:
Commentary and Analysis
Institution:
Istituto Affari Internazionali
Abstract:
According to several pre-election polls, the economy was perceived by many US voters as the key topic in deciding whether to vote Democratic or Republican in the 2024 presidential elections.[1] During Joe Biden’s administration, the US GDP grew steadily and unemployment reached very low levels. Nevertheless, for the first time since 2004, the Democratic Party lost the presidency, the popular vote, the House of Representatives and the Senate. This seemingly paradoxical situation, according to some commentators, finds an explanation in the issue of inflation.[2] From this perspective, a significant number of Americans reportedly voted for Donald Trump due to the sharp price increases experienced during the past four years, blaming the outgoing Democratic administration for failing to sufficiently protect the purchasing power of US citizens and businesses. During and after the election campaign, the tycoon has claimed that he can curb inflation, emphasising his plan to intensify the exploitation of domestic energy resources. This proposal – covered by one of the many executive orders signed by Trump upon taking office – could help contain price increases but is unlikely to be a definitive solution. Likewise, its effectiveness could be largely offset by inflationary pressures arising from other policies that the Republican politician has promised to implement.
Topic:
Domestic Politics, Economic Policy, Inflation, and Donald Trump
Political Geography:
North America and United States of America

2. The influence of gasoline and food prices on consumer expectations and attitudes in the COVID era

Author:
Joanne Hsu
Publication Date:
05-2024
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Food and gasoline prices are extremely salient to consumers, who regularly purchase these goods, and these prices are highly visible. The shared experience of purchasing food and gasoline makes it no surprise that those prices have been blamed for the relatively dismal consumer views of the economy in 2023 amid strong economic indicators, including slowing inflation, low unemployment, and robust growth. At the same time, consumer inflation expectations have eased during this past year. This Policy Brief investigates the role food and gasoline prices play in influencing consumer inflation expectations and economic sentiment, as measured on the University of Michigan Surveys of Consumers, and focuses on the COVID inflationary episode. The author finds that, although consumer sentiment now appears to be more sensitive to inflation than prior to the pandemic, inflation expectations do not. Even though inflation has waned, consumers still spontaneously comment on the negative impact of high prices on their lives. That said, these persistently negative perceptions about inflation have not translated into persistently high inflation expectations.
Topic:
Inflation, COVID-19, Consumer Behavior, and Cost of Living
Political Geography:
North America and United States of America

3. Tilting at Windmills: Bernanke and Blanchard’s Obsession with the Wage-Price Spiral

Author:
Servaas Storm
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that “… we don’t think that the recent experience justifies throwing out existing models of wage-price dynamics.” This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses.
Topic:
Economics, Monetary Policy, Inflation, Macroeconomics, and Wages
Political Geography:
North America and United States of America

4. Implications of the Inflation Reduction Act for the Biotechnology Industry

Author:
Cody Hyman, Henry Dao, Gregory Vaughan, and Fred D. Ledley
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Inflation Reduction Act of 2022 contains landmark provisions authorizing the government to negotiate the price of selected drugs covered by Medicare Part D. The biopharmaceutical industry has criticized these provisions as a threat to innovation arguing that reducing future revenues could disincentivize equity investment in biotechnology. This research examines the sensitivity of private and public equity investment in the biotechnology industry to drug price indices and market conditions from 2000-2022. The analysis shows that equity financing and valuation in the biotechnology industry were strongly associated with equity market conditions but not indices of either producer or consumer drug prices. These results do not support claims of an association between changing drug prices and the availability of equity capital to emerging biotechnology companies, which currently sponsor the majority of all clinical trials. These results add to evidence that the IRA may not have a negative impact on pharmaceutical innovation.
Topic:
Economics, Health, Inflation, Innovation, Biotechnology, Public Investment, and Inflation Reduction Act
Political Geography:
North America and United States of America

5. Good Policy or Good Luck? Why Inflation Fell Without a Recession

Author:
Thomas Ferguson and Servaas Storm
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed’s own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed’s quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular.
Topic:
Economics, Monetary Policy, Federal Reserve, Inflation, and Macroeconomics
Political Geography:
North America and United States of America

6. Implicit Coordination in Sellers’ Inflation: How Cost Shocks Facilitate Price Hikes

Author:
Isabella Weber, Evan Wasner, Markus Lang, Benjamin Braun, and Jens van't Klooster
Publication Date:
11-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
Supply shocks are now widely recognized as a driver of the recent inflation bout, but the role of firms’ pricing strategies in propagating input cost shocks remains contested. In this paper, we review the state of the academic debate over sellers’ inflation and assess whether, in line with this theory, economy-wide cost shocks have functioned as an implicit coordination mechanism for firms to hike prices. We use a dataset containing 138,962 corporate earnings call transcripts of 4,823 stock-market listed U.S. corporations from the period 2007-Q1 to 2022-Q2 to conduct sentiment analysis via both dictionary-based natural language processing and a large language model approach. We find that large input price shocks (as well as their co-occurrence with supply constraints) correlate with positive sentiments expressed in executives’ statements about cost increases. Qualitative analysis provides further insights into the reasoning behind executives’ optimism regarding their ability to turn an economy-wide cost shock into an opportunity to raise prices and protect or even increase profits.
Topic:
Economy, Inflation, Profit, and Corporations
Political Geography:
North America and United States of America

7. Distributional Implications and Share Ownership of Record Oil and Gas Profits

Author:
Gregor Semienuk, Isabella M. Weber, Iain Weaver, Evan Wasner, Benjamin Braun, Philip B. Holden, Pablo Salas, Jean-Francois Mercure, and Neil R. Edwards
Publication Date:
11-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
The 2022 oil and gas crisis resulted in record fossil-fuel profits globally that rehabilitated the oil and gas industry, obstruct the energy transition and contributed to inflation. We analyse the size and the distribution of financial beneficiaries of these unprecedented profits across countries and across wealth groups within the United States, using company income statements and comprehensive ownership data, to construct a global network of shareholdings with 397,619 nodes. We estimate that globally, net income in publicly listed oil and gas companies reached US$916 billion in 2022. The United States was the biggest beneficiary receiving US$301 billion in fossil fuel profits both from domestic extraction and through global shareholding, more than U.S. investments of US$267 billion in the low carbon economy that year. Analyzing the U.S. distribution including privately held US companies, 51% of profits went to the wealthiest 1%, predominantly through direct shareholdings and private company ownership. In contrast the bottom 50% only received 1%. The incremental fossil-fuel profits in 2022 over those in 2021 were enough to increase the disposable income of the wealthiest Americans several percent and compensate a substantial part of their purchasing power loss from inflation that year, thereby exacerbating inflation inequality. Record fossil-fuel profits also reinforce existing racial and ethnic inequalities and inequalities between groups with different educational attainments. Our results also show that only a small share of overall profits benefits institutions that serve the wider public such as pension funds. We discuss how windfall profits taxes could be used to both lower inequality and accelerate the energy transition as increasing geopolitical tensions and climate impacts portend continued volatility in oil and gas markets.
Topic:
Oil, Gas, Inflation, Fossil Fuels, and Energy Transition
Political Geography:
North America and United States of America

8. Did Supply Chains Deliver Pandemic-Era Inflation?

Author:
Phil Levy
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
This Policy Brief argues that supply chain breakdowns were not a principal cause of pandemic-era inflation. Levy focuses on US trade in containerized goods and shows that, within months of the pandemic’s onset, the quantities of goods delivered in fact increased significantly. The sharp increases in inflation and shipping prices and the accompanying delays and empty shelves in the presence of significantly increased quantities suggest, instead, a large positive demand shock. Goods consumption levels rose sharply and remained elevated into 2023 and beyond, even as shipping delays and price hikes dissipated. The author concludes that, while it may be worthwhile to make supply chains more efficient and aim for increased elasticity of supply, the goal of avoiding inflation and shortages is likely better met through improved demand management.
Topic:
Inflation, Trade, COVID-19, Shipping, and Supply Chains
Political Geography:
North America and United States of America

9. Is the United States undergoing a manufacturing renaissance that will boost the middle class?

Author:
Robert Z. Lawrence
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
President Joseph R. Biden Jr. made the goal of his economic policies to “build back better.” He emphasized helping workers without college degrees in order “to grow the economy from the bottom up and the middle out.” The emphasis on a manufacturing renaissance is reflected in the special incentives for US manufacturing in President Biden’s programs: the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act. Lawrence finds little evidence of a renaissance in US manufacturing as of July 2024: US manufacturing employment was barely above its pre-COVID levels. Manufacturing output has grown more slowly than GDP since the pandemic, and productivity in manufacturing has not increased since 2017. Moreover, the Bureau of Labor Statistics projects that over the next decade, manufacturing employment will decline and manufacturing output will grow more slowly than GDP. However, Lawrence says, additional manufacturing employment growth could be in the pipeline because of investment projects that have been announced but not yet completed. Lawrence estimates the additional manufacturing employment potential of announcements compiled by the White House as of mid-2024, finding that these projects could boost demand for 1.7 million manufacturing workers—a growth of 13.3 percent above 2022 manufacturing employment levels. It should be noted, however, that these are not estimates of net overall manufacturing employment growth. Some of the increased demand will be offset by losses of fossil fuel–related jobs displaced by the investments as well as declines in manufacturing employment for other reasons. Moreover, the impact of all the projects is just over 1 percent of overall US employment and in most states far too small to significantly change the opportunities for most non-college-educated workers and disadvantaged communities.
Topic:
Economic Policy, Inflation, Manufacturing, and Middle Class
Political Geography:
North America and United States of America

10. Spillover effects of the recent US monetary policy shocks on the South African economy: The role of monetary and fiscal policy coordination

Author:
Guangling Liu and Marrium Mustapher
Publication Date:
11-2024
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
This study examines how different policy mix regimes affect the impact of recent US contractionary monetary policy on South Africa’s inflation and business cycles. The study uses a small open economy New Keynesian Dynamic Stochastic General Equilibrium model with an integrated fiscal block to analyse these effects. Regime M (active monetary policy) is more effective at containing the spillover effects but leads to higher public debt, requiring larger future fiscal surpluses. The commitment to price stability under Regime M increases real interest rates, raising domestic debt service costs and the debt-to-GDP ratio. Regime F (active fiscal policy), in contrast, stabilizes debt more quickly but at the cost of higher inflation, as it does not use future surpluses to manage public debt. These spillover effects are more amplified under both Regime M and Regime F in the case of a complete exchange rate pass-through and a higher degree of trade openness, with Regime F exhibiting a stronger amplification effect.
Topic:
Foreign Policy, Economics, Monetary Policy, Inflation, and Fiscal Policy
Political Geography:
Africa, South Africa, North America, and United States of America