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 by surprise.

On July 19, 2021, President 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, President 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 H. 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.