Joe Biden Says Inflation Only Grew 'an Inch.' Come Again?
The White House and Powell Fed have different ideas about inflation.
New York Times podcast host Michael Barbaro and Times Federal Reserve and economy reporter Jeanna Smialek claimed that inflation will not come down because consumers and companies are feeding an "addiction" to high prices, despite the Federal Reserve’s best efforts to break the habit.
Smialek said that the Federal Reserve’s effort to lower inflation in America is "not going great at least so far" because the companies that set prices "are really reluctant to stop increasing them quickly," despite’s the Fed raising interest rates.
As the latest New York Times "The Daily" podcast’s subheader claimed, "The Federal Reserve has run up against a stubborn obstacle in efforts to lower prices: companies reluctant to give up fat profits."
FILE - A driver fills a tank at a gas station Friday, Dec. 10, 2021, in Marysville, Wash. Consumer prices rose 6.8% for the 12 months ending in November, a 39-year high. Many economists expect inflation to remain near this level a few more months but to then moderate through 2022 for a variety of reasons. And they don't see a repeat of the 1970s or early 1980s, when inflation ran above 10% for frighteningly long stretches. (AP Photo/Elaine Thompson, File)
The episode began with the economy reporter’s general diagnosis as to why inflation hasn’t "slowed in a big way yet," even though the Fed has embarked on the "most aggressive" interest rate hike since the 1980s.
Smialek stated, "The Federal Reserve has this one tool to slow down inflation, that’s interest rates. They have been raising interest rates quite a bit this year, five times in total, with three really big rate increases in order to sort of make it more expensive to borrow and spend money with hopes of slowing down consumer demand."
She added, "The idea is that if you slow down consumer demand, supply is going to outstrip demand and when that happens prices either fall or at least they climb a lot more slowly. This is the Fed’s recipe for the cooling off the economy."
She mentioned the problem: "What we’re seeing now is that, although the Fed has carried out what is really the most aggressive rate increase cycle since the early 1980s," inflation "is still painfully high."
When pressed by Barbaro as to why this is the case, Smialek replied, "So right now, one big factor that’s making this take a while is that the companies who set prices are really reluctant to stop increasing them quickly."
She argued that this is because companies "got used to being able to charge quite a bit more" in recent years. Barbaro mentioned it’s as if they got "addicted" to the prices, which Smialek agreed with. The reporter added, "And they’re addicted because this has been really good for corporate profits."
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Federal Reserve Chair Jerome Powell has been trying to slow down inflation and avoid a recession. (Getty Images | istock)
The two talked about how this problem was born amid the COVID-19 pandemic. Smialek said, "So what we saw in this sort of mid-pandemic era is that as companies faced rising costs because supply chains were all messed up, factories were shut down amid the pandemic, they started to pass those onto consumers."
But since "consumer demand was so strong," she added, "they could actually pass quite a bit more than just those costs onto consumers. They could charge a lot more than their costs had increased."
"And so what we saw," she continued, "was that corporations were actually pocketing quite a bit more profit off of this."
And even though the pandemic is mostly over, Smialek explained that companies are "at least for the moment trying to protect them. They’re trying to hang onto those big profits." One thing allowing them to do so, according to the reporter, is that consumer demand is still relatively strong.
Inflation in the U.S. is still near a 40-year-high. (istock)
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In response to Barbaro’s inference that demand is still strong because Americans are "less price sensitive than perhaps we had imagined," Smialek said, "It does seem to be that is the case." Though she claimed there still needs to be time for things to "settle out."
Barbaro then summed up what the Federal Reserve’s strategy has been to combat this. He stated, "The Federal Reserve needs to break an addiction that both companies and consumers are feeding and the best way they can do that is by lowering this hammer [interest rate hikes] over and over and over again until enough consumers scream ‘Uncle!’ and stop buying all the things we’re talking about and companies get the message" they have to lower prices.
Smialek responded, "Right. That’s effectively the idea."
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