Food, new cars, and rent are three of the largest contributors to our current rate of inflation. What is causing the price increases for these items, is Biden in any way responsible, and can the Fed solve the problem?
FOOD: The need to eat is inelastic and universal, so the problem here clearly is not one of a sharp increase in demand. Food price inflation is the result of price increases for inputs that were caused primarily by the war and climate issues. Biden’s spending programs had nothing to do with it, and the Fed can do nothing to help.
NEW CARS: There is no evidence indicating that the demand for new cars has spiked, so the issue clearly revolves around lingering supply chain issues caused by the pandemic. Since demand is not the problem, Biden’s spending programs are not the cause. The Fed can limit demand further by effectively mandating higher interest rates on car loans, but if the problem isn’t demand, what’s the point?
RENT: This one is complicated. Soaring rents are the result of a lack of residential construction over the last decade and increased demand for space caused by the pandemic. Biden bears no responsibility for either of these factors. The Fed can address the issue of rising house prices by raising interest rates, but frustrated buyers are being thrown into the rental market, which just moves housing demand into another quadrant, given that the demand for shelter is inelastic. In addition, making housing construction more expensive simply exacerbates the supply problem. On balance, therefore, the Fed will do more harm than good on this issue by raising rates.
The bottom line is that the Fed has reason to increase interest rates to the point that monetary policy is neutral instead of expansionary, but any attempt to solve the current inflation problem with tight money will only work on a purely psychological basis; it has no support in logic or the data.