Last month, President Biden rejected accusations that his administration’s policies have caused the runaway inflation now plaguing the economy. In general, holding a president accountable for economic setbacks, in this case, runaway inflation, is unfair. But in some cases, including this one under President Biden, the president, and his policies can and should be held accountable.

The Consumer Price Index rose 9.1% for the 12 months ended June, the highest inflation in 40 years, according to yesterday’s report from the Labor Department. The Producer Price Index (wholesale prices) rose even more, up 11.3% in the year ended June. I think it’s fair to say we’re seeing runaway inflation. The question is, why?

Here’s why. In President Biden’s case, he created the conditions for 9.1% inflation with a single policy. Just weeks after taking office, Biden embraced the 80-year-old tenets of New Deal liberal Keynesianism and proposed an economic stimulus package including nearly $6 trillion in new government spending. The package comprised three major components: pandemic relief, infrastructure spending, and family-oriented programs.

This was ambitious but unnecessary because the Trump administration had already passed major relief legislation the year before. The 2020 CARES Act totaled $2.2 trillion, nearly 10% of the nation’s gross domestic product, and was the largest such stimulus package in American history. And it succeeded – the economy grew by 33% (annual rate) the next quarter. Then In December 2020, Congress injected an additional $900 billion into the recovering economy.

By the time Biden announced his plan, several economists – including prominent ex-officials in preceding Democratic administrations – were strongly warning that implementing his program would have inflationary consequences. The administration ignored them, and in March 2021, Biden secured passage of the package’s first component, the $1.9 trillion American Rescue Plan.

In April, Biden introduced the second and third components of his package for an additional total of $4.0 trillion in new spending. Shortly thereafter, the inflation rate – which had hovered around 2% for the previous several years – jumped above 5%.

The Biden administration characterized its massive spending plan as economic relief but, in the middle of back-to-back quarters marked by historic growth rates, the additional spending only triggered the inflation latent in the economy.

When inflation hit 5%, the Biden administration assured us it was only “transitory.” Regular readers may remember I questioned the idea that this round of inflation was only temporary, as the Biden administration claimed. And what happened? CPI proceeded to cruise to 8.6% by May 2022 and as noted above, soared to 9.1% for the 12 months ended June. Economists surveyed by Bloomberg expected it to hit 8.8% for June on average, so it exceeded pre-report expectations.

In fairness, some of the impetus for inflation rising from 5% to 9.1% was Russia’s war with Ukraine. Ukraine is a big exporter of grains, like wheat, barley, and corn, as well as fuel, petroleum products, steel and coal. All of these exports have been interrupted to varying degrees by the war with Russia, and this has contributed to higher prices across the board.

The war between two of the world’s “breadbaskets” has decimated the global supply of food and fertilizer, and has pushed world food prices up 12%-15% or more than the same time last year.

On the energy front, termination of Russian oil and natural gas imports has also propelled world prices substantially higher. In the United States, gas prices have soared, rising over 100% since Biden took office.

Under President Trump, the United States became the world’s largest energy exporter and still was as recently as 2021. But upon taking office, Biden canceled the long-delayed Keystone XL pipeline and halted new oil and gas leases and drilling on public lands.

Biden’s responses to war-induced shortages have been feckless, ranging from releasing small amounts of oil from the Strategic Petroleum Reserve, accusing energy producers of price gouging, calling for a gas-tax holiday, cravenly reversing American diplomacy with Saudi Arabia and Venezuela, and predictably, blaming Russia.

So, here we are with inflation at the highest level in 40 years, gasoline prices at or near all-time highs, food prices up sharply, and no sign this will end anytime soon. The Fed has responded by raising interest rates three times this year, and it is expected to continue at the final four meetings in 2022 and likely beyond.

And finally, there’s this. The Atlanta Fed’s GDPNow indicator has fallen decidedly into recession territory, as you can see below. The good news is GDPNow has been in positive territory for most of the 2Q, only falling into recession territory in the last week of June.

I remain optimistic that 2Q GDP growth overall will be at least mildly positive when the Commerce Department releases its first estimate on July 28 – meaning we avoid two consecutive negative quarters in GDP – which is the general definition of a recession.

But whether the 2Q was mildly positive or not, the above chart is alarming. If we’re not already in a recession, it looks like we will be soon. That’s not good for the stock markets or bonds for that matter.

More By This Author: