Analysis: U.S. policymakers misjudged inflation threat until it was too late

Prices for just about everything Americans buy—gas, groceries, housing, cars, clothes, even TVs—have spiked in the past two years. Inflation, which had been scarcely noticeable for decades, is suddenly the top concern most people have about the economy.

And it all seemed to catch Washington, D.C., by surprise.

On July 19, 2021, President Joe Biden played down the risk of persistent inflation, telling reporters that price hikes “are expected to be temporary.” This month, Biden called reining in prices his “top domestic priority.”

What changed?

A combination of factors—including surges in the coronavirus, supply chain problems, Russia’s invasion of Ukraine and a dramatic shift in consumer spending patterns—all made things more expensive. It didn’t help that the increases began in uneven and seemingly disconnected ways. Housing prices went up, initially, because the pandemic changed where people wanted to live. Rental car prices went up, in part, because companies sold off their fleets when tourism dipped. But eventually these one-off developments fused to create a much broader calamity, rattling the economic and political foundations of the country—making clear policymakers had failed to recognize the mounting inflationary crisis.

Here’s a look back at what the top economic officials in the White House and the Federal Reserve were saying and doing about the problems as they developed, and how they fell behind:

– February 2021: Biden emphasizes risk of insufficient stimulus

In the State Dining Room of the White House on Feb. 5, Biden argues that the U.S. economy faces a bigger risk from doing too little to fight the downturn than doing too much. His administration had been pushing a large stimulus plan intended to reduce unemployment, inject new firepower into the anemic job market and quickly grow the economy. “If we make these investments now, with interest rates at historic lows, we’ll generate more growth, higher incomes, a stronger economy, and our nation’s finances will be in a stronger position as well,” Biden says. “So, the way I see it: The biggest risk is not going too big, if we go—it’s if we go too small.”

Biden is talking about injecting nearly $2 trillion in new federal spending into the faltering economy, even as some question the total, coming so soon after previous stimulus efforts, citing the risk of inflation.

About two weeks later, Federal Reserve Chair Jerome Powell says the money the government is spending on stimulus and COVID relief shouldn’t be a problem. “I really do not expect we’ll be in a situation where inflation rises to troublesome levels,” Powell tells the Senate Banking Committee, as Congress nears approval of Biden’s $1.9 trillion stimulus plan. “This is not a problem for this time.” A “burst” of new spending shouldn’t cause unwanted inflation, he says.

– March 2021: Biden signs stimulus, but criticism emerges

On March 11, Biden signs into law a $1.9 trillion economic relief plan, the American Rescue Plan, that had been passed by Congress only with Democratic votes. Despite united GOP opposition and warnings from some centrist economists, Democrats approve hundreds of billions of dollars in new stimulus checks, state aid, extended unemployment benefits and a host of other measures. “This historic legislation is about rebuilding the backbone of this country and giving people in this nation—working people and middle-class folks, the people who built the country —a fighting chance,” Biden says in the Oval Office. Soon, the government starts sending new $1,400 checks to millions of Americans, the third round of stimulus payments following two under former president Donald Trump.

Three days later, the Biden administration’s top economic thinker downplays the potential danger of rising prices. “Is there a risk of inflation? I think there’s a small risk,” Treasury Secretary Janet Yellen says on ABC’s “This Week.” “So I don’t think it’s a significant risk.” Yellen also says prices may appear artificially high due to the collapse of demand during the coronavirus pandemic, but that those changes were not likely persistent. “Prices fell a lot last spring, when the pandemic surged. I expect some of those prices to move up again, as the economy recovers the spring and summer. But that’s a temporary movement in prices,” Yellen says, previewing the administration’s argument over the next several months.

Not everyone is convinced. In a March 15 op-ed in The Washington Post, former Obama White House economic adviser Lawrence Summers criticizes the Fed and predicts “stagflation and recession” in 2022. He says Fed officials are engaging in wishful thinking if they don’t worry about inflation. “I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely.” Summers says unemployment and inflation will both average over 5% over the next few years, and that policies will lead “ultimately to a major recession.” One early indicator emerges that Summers might be right: Overall inflation remains low, but prices for used cars skyrocket, up 17% since the pre-vaccine summer of 2020.

– May 2021: Yellen rattles markets

Yellen says that the Federal Reserve may need to respond to rising prices, leading to a brief panic in the stock market and, later, a clarification from the treasury secretary. “It may be that interest rates will have to rise somewhat to make sure our economy does not overheat,” Yellen says at a forum sponsored by the Atlantic on May 4.

After the stock market dips, Yellen tells the Wall Street Journal at a separate event the same day: “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address them.”

Vaccines for the coronavirus are distributed more widely, fueling new hope that the economy may begin to gain steam. The April unemployment rate remains lackluster, but the jobs market begins to improve in May.

– June 2021: Yellen says inflation could hit 3%; the Fed predicts rate hikes

At a meeting of Group of Seven finance ministers in London on June 5, Yellen acknowledges for the first time that inflation could wind up running higher than expected. “We have in recent months seen some inflation, and we—at least on a year-over-year basis—will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3%,” she said. “But I personally believe that this represents transitory factors.”

On June 16, the Fed revises forecasts for inflation, predicting a 3.4% rate by late 2021, up significantly from its previous estimate. “Inflation could turn out to be higher and more persistent than we expect,” Powell says at a news conference. The bank keeps interest rates near zero but signals that it might raise them sooner than anticipated. Government statistics show the employment picture improving, with 559,000 new jobs added in May, but Republicans say pandemic-driven increases in unemployment benefits are keeping employees home instead of working.

– July 2021: Biden calls inflation ‘temporary’

July marks a turning point for the labor market, with nearly a million jobs created, as stimulus benefits and more generous unemployment continue to flow through the economy. On the White House lawn, Biden declares that the nation is “closer than ever to declaring our independence from a deadly virus,” even though the delta variant is already raising alarm in other countries.

The first Child Tax Credit payments go out on July 15, with households getting monthly checks of a few hundred dollars.

Prices are also beginning to rise more quickly, especially for groceries, gas and rent. Biden seeks to reassure the country by arguing that inflation won’t prove long-lasting. On July 19, he acknowledges that “we’ve seen some prices increases” but dismisses the views of economists who think the problem amounts to a more serious threat. “Some folks have raised worries that this could be a sign of persistent inflation. But that’s not our view. Our experts believe and the data shows that most of the price increases we’ve seen are—were expected and expected to be temporary,” Biden says.

– August-September 2021: Price hikes ease, job growth appears to slow as delta spreads

The Fed and the White House maintain that supply chain glitches related to the pandemic are making it hard for businesses to keep up with rising consumer demand. They insist that when things return to normal, prices will fall again, too. “One month does not make a trend … and we know supply constraints persist in various sectors,” the White House Council of Economic Advisers tweets.

Biden administration officials also call for oil companies to boost production to ease gas costs. Used car prices—the early indicator of inflation problems in the spring—are up even more, and now stand 41.7% higher than they were a year ago.

Meanwhile, as the delta variant rages, the economy looks like it could be stumbling. The initial draft of the August jobs report, released on Sept. 3, shows a disappointing 235,000 jobs added, far below economists’ projections and a steep drop from earlier in the summer. Biden acknowledges the somber news but projects optimism: “While I know some wanted to see a larger number today, and so did I, what we’ve seen this year is a continued growth, month after month, in job creation.”

In one bright spot, August inflation data comes in lower than July, breaking an eight-month rising streak and giving policymakers new hope that prices could be topping out. The Council of Economic Advisers calls the news “encouraging” but notes that inflation could rise or fall in coming months.

The data suggesting both slowing jobs growth and inflation gives policymakers some sense that there’s not a pressing need to tamp the brakes to keep the economy from overheating.

– October 2021: More signs the economy may be slowing

Economists had forecast 500,000 jobs would be added in September, but the initial report released on Oct. 8 says only 194,000 were created, not enough to get to full employment for a while. The unemployment rate drops to 4.8%, but large numbers of people, especially women, leave the labor force as the pandemic drags on. Gross domestic product growth drops in the third quarter, but experts say 2021 is still on track to show the fastest overall growth in the economy since 1984.

– November 2021: Inflation no longer looks temporary; job growth is revealed to be much stronger than reported

The Fed moves on Nov. 3 to ease off its massive purchases of bonds, which has helped keep interest rates low and stimulate the economy. Powell says the Fed won’t let inflation become permanent and that the bank will use its tools to prevent higher prices from becoming entrenched, but he notes “sizable price increases in some sectors” and says inflation and supply chain disruptions “will persist” into 2022.

When the Bureau of Labor Statistics issues revised estimates for June through September, it’s suddenly clear that the government’s initial reports underestimated employment growth by some 626,000 new jobs—the largest underestimate of any comparable period dating back more than 40 years. What looked over the summer like a slowing recovery turns out to have been an economy that was still sizzling hot.

Initial estimates for October also show the economy added 531,000 jobs, with the unemployment rate dropping to 4.6%. Wages push higher as well, despite continued supply-chain backups: A lagging government report shows that a record 4.4 million people quit their jobs in September, motivated by the chance to find better pay elsewhere. By late November, the number of weekly unemployment claims hits a 50-year low of 199,000.

Recognition of the roaring job market comes with the realization that inflation is also soaring—and may not be temporary. Spikes in energy prices and problems with supply chains drive prices up by 6.2% compared with October 2020, the biggest inflation jump in about 30 years. When the data comes out on Nov. 10, Sen. Joe Manchin III, D-W.Va., warns the White House that Washington “can no longer ignore the economic pain Americans feel every day.”

Biden says “reversing this trend is a top priority for me,” but administration officials still argue that supply chain issues are causing temporary price hikes. The White House is optimistic that inflation could soon cool, and Biden signs a $1.2 trillion bipartisan infrastructure bill into law in a South Lawn ceremony on Nov. 15. The spending deal, a culmination of months of difficult negotiations with Republican lawmakers, represents a key win for the administration’s economic agenda after months of criticisms over rising prices. “This law is a blue-collar blueprint to rebuild America. It leaves no one behind,” Biden says.

By the end of November, the Fed backs away from the idea that inflation is “transitory.” Powell tells a Senate Banking Committee hearing on Nov. 30 that it’s “probably a good time to retire that word and try to explain more clearly what we mean.” Earlier that month, he emphasizes that Federal Reserve officials “understand completely that it’s particularly people who are living paycheck to paycheck or seeing higher grocery costs, higher gasoline costs—when the winter comes, higher heating costs for their homes. We understand completely what they’re going through.”

– December 2021: Inflation hits 40-year high; Fed says rate hikes are coming; Biden’s Build Back Better agenda looks dead

Inflation data released on Dec. 10 shows a 6.8% increase compared to the year before, the largest jump since 1982. Prices are up in just about every sector, from pork, poultry and produce, to housing and sporting goods. Biden touts his Build Back Better social spending bill as a way to help families keep up with rising prices, but Republicans say the administration’s economic policies are causing, not easing, inflation.

The next week, the Fed shifts its policy focus from unemployment, which has remained near record lows, to inflation, which is a more serious danger. “There’s a real risk now, we believe—I believe—that inflation may be more persistent,” Powell tells reporters on Dec. 15. “The risk of higher inflation becoming entrenched has certainly increased. I don’t think it’s high at this moment, but I think it’s increased.” He says the Fed will finish tapering its asset purchases by March and raise rates after that.

That weekend, Manchin crushes White House hopes of passing a sweeping economic package after a rift emerges between him and the president. Manchin repeatedly cites his concerns with rising prices and blames excessive federal spending. “My Democratic colleagues in Washington are determined to dramatically reshape our society in a way that leaves our country even more vulnerable to the threats we face,” Manchin says in a statement on Dec. 19. “I cannot take that risk with a staggering debt of more than $29 trillion and inflation taxes that are real and harmful to every hard-working American at the gasoline pumps, grocery stores and utility bills with no end in sight.”

At year end, Biden’s signature economic measure, the enhanced Child Tax Credit, expires amid a broader standoff over the White House domestic agenda. Republicans and Manchin blame the child tax credit for pushing up inflation. But its expiration leads child poverty to jump more than 50%, researchers at Columbia University later estimate.

– February 2022: Russia invades Ukraine, sending food and energy prices soaring

After a months-long buildup, Russia attacks Ukraine with ground forces, missiles and aircraft. Western governments initially expect Kyiv to fall quickly. They impose immediate economic sanctions on Russia and President Vladimir Putin, especially targeting Russian energy sales to Europe. Additional sanctions roll out over the next few weeks, as Ukrainian resistance to the invasion is stronger than expected—and Russian military competence lower than the West had feared.

The sanctions aim to cripple Russia’s economy. But the fallout and the effects of the war spread widely, spiking global prices for oil, natural gas and food, especially grain and cooking oils. The invasion partly dashes the White House’s hopes for quickly cooling inflation.

– March 2022: Fed raises interest rates for the first time since 2018

Hoping to curb inflation, the central bank raises interest rates by a quarter of a percentage point on March 16. “Inflation is likely to take longer to return to our price stability goal than previously expected,” Powell says at a news conference after meeting with the central bank’s policymakers. The central bank says it expects seven interest rate hikes in 2022—up from its previous projection of three—and predicts inflation could fall to 4.3% by the end of December.

– May 2022: Inflation is ‘much too high,’ Powell says; Fed raises rates again

After four years with no interest rate increases, the Fed hikes them again on May 4, this time by a half percentage point, the sharpest hike in more than 20 years. “Inflation is much too high,” Powell says. The Fed also announces plans to shrink its $9 trillion balance sheet.

The latest inflation report for April shows a slight easing to 8.3% compared to a year earlier, showing some of the slowest gains in months. But inflation remains near 40-year highs with a long way to fall before Americans feel relief.

Despite the administration’s initial posture, the White House is forced to acknowledge voter discomfort with rising prices. “I want every American to know that I’m taking inflation very seriously and it’s my top domestic priority,” Biden says on May 10. Still, he insists the causes are unrelated to his administration’s fiscal policy. “There are two leading causes of inflation we’re seeing today. The first cause of inflation is a once-in-a-century pandemic,” he says. “This year we have a second cause—Mr. Putin’s war in Ukraine.”

The Senate votes 80 to 19 on May 12 to confirm Biden’s nomination of Powell to a second term as Fed chair, despite questions about whether the Fed has moved quickly enough to tackle rising inflation. The same day, Powell tells Marketplace that the bank probably should have acted faster.

“If you had perfect hindsight you’d go back,” he says, “and it probably would have been better for us to have raised rates a little sooner.”