02:28 - Source: CNNBusiness
How the Biden WH predictions about inflation are biting back now
CNN  — 

There are few things that President Joe Biden wants more than to see inflation subside.

But the few tools that he – and governors – have in their arsenal to help Americans cope with high prices will probably prolong the pain, experts say.

Biden has spent this week outlining his administration’s plans to fight inflation while at the same time acknowledging there’s not much he can do about it.

He has pointed to his ordering the largest release from US oil reserves in history. The President is also allowing year-round sales of fuel containing more ethanol, which is cheaper.

In addition, he’s trying to address supply chain problems by releasing a plan to recruit and retain more truck drivers and by making longer-term investments in ports and domestic manufacturing of critical materials, including minerals needed for technology.

Meanwhile, governors and state legislatures are using their revenue windfalls to enact a wide array of income tax cuts, gas tax holidays and rebates. They are touting their efforts to help their residents afford the skyrocketing cost of gas, groceries, housing and other necessities.

Just this week, New York became one of the latest states to suspend certain taxes on gas and diesel fuel. It will provide a reduction of at least 16 cents through the rest of the year, said Gov. Kathy Hochul, a Democrat.

“By suspending certain fuel taxes for the next seven months, New York is providing some $609 million in direct relief to New Yorkers – a critical lifeline for those who need it most,” she said in a statement.

Unintended consequences

But such moves, especially when they are not targeted at the neediest Americans, can backfire.

“Economy 101 is when you have demand-induced inflation, you don’t cut taxes,” said Howard Gleckman, senior fellow at the nonpartisan Tax Policy Center. “Because when you cut taxes, all you are going to do is give people more money to spend, and it’s going to increase demand. That’s not a great idea.”

As long as demand remains strong and supply chain shortages continue, prices will remain elevated.

Giving drivers a break on gas prices, for instance, doesn’t provide an incentive for oil companies to produce more fuel and for users to conserve, said Scott Hoyt, senior director for Moody’s Analytics.

“It doesn’t get you the added supply and reduced demand that you need to solve the shortage,” he said.

While those struggling to afford essentials might benefit from targeted assistance, such measures typically aren’t very popular. That’s especially true in times of high inflation, which everyone experiences at the gas station and the supermarket.

“There’s a real political issue. If you are handing out money, everybody wants it,” said Diane Swonk, chief economist at Grant Thornton. “The more you give it to everybody, the less targeted it is and the more it perpetuates inflation.”

Looking to the Federal Reserve

Biden also met with Federal Reserve Chairman Jerome Powell this week to discuss high prices, noting in a Wall Street Journal op-ed that the Fed has the “primary responsibility to control inflation.” However, he promised not to try to influence the central bank’s decisions.

The Fed can use monetary policy tools – primarily raising interest rates, which it started to do this year – to constrain demand until the supply chain shortages improve.

“Getting out of the way of the Fed is probably the most important thing they can do,” Gleckman said of the Biden administration.