Jan 11, 2023 - Economy

The Fed isn’t the only inflation fighter

Illustration of multiple weapons pinning a one hundred dollar bill to a target.

Illustration: Lindsey Bailey/Axios

Policymakers and economists are finding that when it comes to fighting rising prices, it takes a village. The Federal Reserve's interest rate hikes aren't the only game in town.

Why it matters: The latest inflation numbers are due out Thursday, and analysts believe they'll show that the rate of price growth slowed further in December but the story of how the economy got to this point isn't just about Fed chair Jerome Powell. It's as complicated as inflation itself.

The big picture: The last time inflation ran hot in the U.S. decades ago, the Fed famously hiked rates hard, triggering double-digit unemployment.

  • The Fed is using that same strategy now — but it's not working alone. The Biden administration and some European governments also flipped key policy levers, particularly around energy — a major inflation driver.

Details: The White House helped push gas prices lower through its use of the Strategic Petroleum Reserve, as Axios' Matt Phillips has reported. The White House is also trying to spur more oil production in other ways.

  • Meanwhile, the German government late last year passed measures to cap energy prices in the country. Starting this month, every household and business gets a certain amount of gas and electricity — up to 80% of past usage — at a below-market price.
  • The idea is to help people pay their bills without increasing the demand for energy, which would push up prices.
  • Energy costs in Germany are still eye-popping. They were up 24% in December 2022 from the year-ago period, an improvement from the prior month when prices were up 39% year over year.

What they're saying: "It's not enough to simply raise interest rates and push down the whole economy, you have to start thinking about measures that target the sectors that are important for inflation," says Isabella Weber, an economist at the University of Massachusetts, Amherst, who worked with the German government on its energy price policy.

  • She recently published a working paper that identifies 10 sectors that contribute more to inflation than all others. These include oil and energy products, farming, food and housing.
  • Weber tells Axios that if governments can figure out ways to manage price shocks in these sectors, then they can avert, or get ahead of, future inflation — so the drastic measure of triggering a recession can be avoided.

Of note: Even the White House's handling of the potential rail strike last year was done with an eye toward managing inflation, says Claudia Sahm, a former Federal Reserve economist.

  • A strike's impact on trade and supply chains would have certainly been inflationary, she says. So the pro-labor White House walked "a tightrope," forcing workers to accept a deal that wasn't satisfactory to many workers and their advocates.
  • Plus: Fiscal spending in the form of big cash transfers to Americans, of the sort we saw in 2020 and 2021, isn't a thing anymore. Lawmakers on both sides are wary of contributing to inflation.

Yes, but: There are many economists, perhaps most famously former Treasury Secretary Larry Summers, who maintain that a Fed-engineered recession may be the only way to tame high inflation.

The bottom line: There's no single way to explain the sharp increase in prices we've been living through. There's the cost of restarting a stopped economy, the war in Ukraine, supply chain shocks and shifts in consumer demand.

  • A complex phenomenon probably isn't going to have one simple solution.
  • "We all want simple stories. We want something to just be the magic bullet and be done with those," says Sahm. "That's never true in life. And it's certainly not true in a $20 trillion economy."
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