Soaring inflation was the top issue for a lot of voters heading into the midterms, with most saying Republicans would do a better job of handling the problem.
Indeed, Republican candidates took full advantage by hammering Democrats on the issue and pushing their own ideas to fight inflation.
I doubt either political party will have much, if any, effect on inflation.
Inflation, or a sustained rise in consumer prices, is created in two main ways.
The first is by way of an increase in demand for products and services.
When these types of demand-driven price increases occur across many products and services, the result is rising inflation.
Inflation can also result from higher production costs.
For instance, gas prices are on the rise because it has become a lot more expensive to produce it. The war in Ukraine sent oil prices soaring in early 2022. They’ve come down, but a recent supply cut by OPEC+ oil-producing nations caused another spike.
The increase in the price of eggs is another example of this type of inflation. Bird flu caused the deaths of about 10% of egg-laying hens beginning in January 2022. In addition, farmers faced higher fuel and fertilizer costs. These factors have caused the average price of eggs to soar to an all-time high.
An economy’s central bank – not Congress or the president – is typically the first line of defense against inflation. Central banks set monetary policy, and their primary way of combating inflation is by raising interest rates.
In the U.S., the Federal Reserve focuses on the so-called federal funds rate, which is the base rate that banks use in setting their deposit and loan rates. The Fed has raised this benchmark numerous times this year.
The main goal is to increase borrowing costs and drive down demand for goods and services. The problem is that this approach has no effect on the other main generator of inflation, rising production costs.
The Fed’s higher rates will not stop the war in Ukraine or prompt hens to lay more eggs. Therefore, energy and egg prices won’t drop as a result. This is also true for all products and services whose production costs are increasing because of supply chain issues.
Congress and the White House do have some tools they can use in the inflation fight. But they’re not very popular. And they address only one kind of inflation.
The main thing the government can do is take money out of the pockets of consumers and businesses, either by raising taxes or cutting spending – or both. A reduction in money in the economy leads to lower demand, both as the government spends less and individuals and businesses give more or get less from the government.
But it won’t do anything to fix the global economy’s ongoing supply chain problems or lower production costs.
So even while Congress might want to do more about inflation, whatever it does will affect only one of the drivers.
Taking a step back, does either political party have a better track record on inflation?
The short answer is no. From Presidents Dwight D. Eisenhower through Donald Trump, inflation has averaged 3.35% under Democratic administrations and 3.5% under Republicans.
One caveat, however. When the House and Senate are controlled by Republicans while the president is a Democrat, inflation averaged 2 percentage points less than when everything was in Democratic hands.
Another way to look at this is to examine the parties’ current or proposed policies. Democrats have touted their “Inflation Reduction Act,” a package of climate, health care and tax measures passed in August. But economists expect it to have very little impact on inflation anytime soon.
Republicans have proposed cutting spending and lowering taxes for wealthier individuals and businesses. While spending cuts could reduce demand – and inflation – the lower taxes could drive up prices by pumping more money into the economy.
In other words, turn to hope that the Fed’s rate hikes work and the supply chain problems driving up costs begin to ease.
William T. Chittenden is an associate professor of finance at Texas State University. Distributed by The Associated Press.
