Just two days after the midterm elections, in which they fared much better than anticipated, the Democrats received another welcome surprise. The latest Consumer Price Index report showed that after more than a year and a half of record inflation, the worst since the early 1980s, prices had at last begun to fall. Investors hailed the news, but it’s still too early to know whether October’s drop—from 8.2 to 7.7 percent—marks a true turning point. Jerome Powell, chairman of the Federal Reserve, has remained circumspect, saying that the fight against inflation is far from over and signaling that the central bank is on track to raise interest rates by another 0.5 percent in December. And despite modest easing in markets for some goods, like used cars and airline tickets, consumers remain squeezed by steep hikes in necessities such as housing, fuel, and food—the cost of groceries, for example, is up 12.4 percent from last year.
All of this, Republicans have argued, is the Democrats’ fault—the foreseeable result of pumping trillions of dollars into the U.S. economy for pandemic relief, infrastructure expansion, and entitlement programs like Social Security, Medicare, and Medicaid. On this point, Republicans seem to have poor memories: pandemic relief actually began under former President Trump, and every round except the last was bipartisan. But their “plan” for combating inflation is even worse than their explanation for it: they would repeal recent tax increases on corporations, extend the 2017 Trump tax cuts for high earners, “defund” the IRS, and block Biden’s action on student-debt relief. As Democrats have pointed out and even some conservative economists concede, some of these policies would likely exacerbate inflation.
The real causes of inflation are complex. Most economists have pointed to the initial pandemic stimulus, subsequent supply-chain disruptions, labor shortages and higher wages, and the oil and grain shocks following Vladimir Putin’s invasion of Ukraine as among the chief culprits. Though it’s received less attention, there’s another major cause hiding in plain sight: corporate profits have risen rapidly since the beginning of the pandemic, with margins (the difference between revenue and expenditures) reaching their highest levels since the 1950s.