As President Joe Biden’s time in the Oval Office winds down, observers are peering in the rearview mirror. The chattering class is, of course, viewing the last four years with great nostalgia. For everyone else, it was a period of high prices, soaring borrowing costs, bank failures, ballooning debts, and, based on The Wall Street Journal’s recent reporting, a shadow government. The most notable outcome of Bidenomics, a nickname for the incumbent’s economic agenda, was a 40-year-high inflation. Now that a new administration is on the horizon, is a cure for high prices being manufactured in the economic laboratory of Mar-a-Lago?
Evaluating High Prices
Federal Reserve Chair Jerome Powell told reporters at the post-meeting Federal Open Market Committee in December that one of the principal reasons for the “vibecession” is that the American people are feeling the agonizing pain of high prices. Indeed, the cost of living has spiked in a very short time.
Since January 2021, the consumer price index (CPI) has surged 21%. The producer price index (PPI), a gauge of prices businesses pay for goods and services, has climbed 24%. Real (inflation-adjusted) hourly wages have slumped 3%, and real median weekly earnings have dipped 0.5%. Americans’ purchasing power has eroded 17%.
These are the headline numbers. A deeper dive into the CPI or PPI reports reveals more significant percentage gains for everyday goods and services. Eggs have spiked 148%, coffee has risen 50%, beef has surged 42%, gasoline has risen 35%, potato chips have jumped 32%, and electricity has increased 30%. Motor vehicle insurance and shelter have swelled by 29% and 25%, respectively.
While real wage gains have outpaced inflation this year, they have not recovered overall. In fact, according to Bankrate's September Wage to Inflation Index, workers are on track to recuperate earnings lost to inflation by the second quarter of 2025. This assumes that the US labor market remains intact and annual wage growth is around 4%.
“What was a previously red-hot job market is now a pretty normal-ish job market. Bargaining power, broadly speaking, has also moderated and normalized,” said Mark Hamrick, the senior economic analyst at Bankrate.
Can Trumponomics Defeat Bidenflation?
During the 2024 election campaign, President-elect Donald Trump vowed to eradicate inflation, with a focus on “frack, frack, frack” and “drill, baby, drill.” He and his team believe that if the United States expands energy output, it will seep into the broader marketplace. This is a commendable action plan for lowering food prices since lower energy prices can trim production, overhead, transportation, and other related costs.
Does this mean the price of bread, which has swelled 25% over the last four years, will fall 25% over the next four years? Unlikely. Instead, what could transpire is the growth rate could flatline, allowing workers’ wages and financial situations to front-run inflationary pressures, which could be rekindled amid threats from the Federal Reserve, government spending, and Trump’s trade agenda.
Another idea that could extend relief to millions of people is limiting tax burdens. The president-elect has proposed eliminating taxes on tips, Social Security benefits, and overtime pay. Economists have debated the merits of these concepts, highlighting how much it would affect the public purse, especially for a government drowning in a $36 trillion national debt, $2 trillion budget deficits, and $200 trillion in unfunded obligations. On the microeconomics front, allowing folks to keep more earnings can ease the strain of high prices.
But are these short-term panaceas that will exacerbate the nation’s long-term ailments? The incoming administration, whether soon-to-be Treasury Secretary Scott Bessent or soon-to-be Commerce Secretary Howard Lutnick, believes that the federal government can climb out of the mountain of IOUs.
“I think this is the last chance for America to grow its way out of its debt problem,” Bessent said on CNBC’s Squawk Box in September. “If you can increase growth, you can change the trajectory.”
Ultimately, allowing wages and the wider economy to outpace inflation might be the only effective means the administration can employ. However, given how the CPI has mirrored the patterns of the 1960s, 1970s, and 1980s, it might be easier said than done to slay the dragon of high prices. Trump is confident it can be achieved, though he might have a hawkish adversary in the Eccles Building until 2026.
Yes, Yellen Was Right
Heading into Christmas, House Republicans took one last swipe at the outgoing president. House Ways and Means Committee Chairman Jason Smith (R-MO) said in a Dec. 20 statement:
“The Biden-Harris Administration’s parting gift to the American people is as welcome as a lump of coal at Christmas: higher prices that keep rising. Families have been hammered by a 20 percent spike in prices under President Biden that has made the cost of living unaffordable. The American people are ready for the Trump presidency and a return to a strong, prosperous economy that created good-paying jobs.”
Treasury Secretary Janet Yellen was right when she told 60 Minutes and congressional lawmakers this year that prices will not return to pre-pandemic levels. When an inflation bomb goes off, it resets prices, leaving businesses and consumers with more expensive bills. The only solution to eviscerate the last few years from the public’s collective memory would be a severe case of deflation, which would require a collapse in the money supply, dramatically higher interest rates, and plummeting consumer demand. Is there an appetite for this in the land of Trumponomics?
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