Biden Activists Eye Regulatory Response to Inflation

by Greg Valliere, AGF Management Ltd.

August 31, 2021

THE FEDERAL RESERVE MAY BE IN NO HURRY to confront inflation, but progressives in the Biden Administration — sensing a political threat — are about to toughen regulations on firms that raise prices. This may not end well.

BIG GOVERNMENT HAS NEVER BEEN ABLE TO TAME INFLATION (see: Richard Nixon’s price controls), but there’s a zeal among Biden’s aggressive young regulators to give it a try. They see collusion everywhere, and they don’t need congressional approval to act.

A REMARKABLE ARTICLE in this morning’s Washington Post reports that the Biden administration is ramping up efforts to police corporate monopolies and alleged collusion by big companies, “arguing that a crackdown on corporate malfeasance will translate into cheaper goods.”

THE FIRST TARGET, according to the Post, is oil and gas companies that Biden aides say may be colluding to raise fuel costs. Next in line are measures to prevent large agricultural processors and meatpackers from squeezing consumers and farmers.

THIS AGGRESSIVE ASSAULT on higher prices is designed to calm consumer anxiety and improve the Democrats’ fading 2022 election prospects — and there’s no more visceral inflation anxiety than fears of higher food and fuel prices. Next may be the shipping industry, where clogged cargo ships are sitting at ports and driving up the cost of imported goods.

WE CLING TO THE OLD-FASHIONED VIEW that inflation is largely a monetary problem, plus a labor compensation problem. Prices for goods such as lumber have dropped dramatically, as supply ramps up to meet demand. Despite a clear threat that labor costs are intractable, Fed Chairman Jerome Powell made it clear late last week that the Fed will move very, very slowly on rate hikes, still at least a year away.

THE FED’S PASSIVITY OVER INFLATION could allow the central bankers to tolerate bubbles that are worrying economists from Larry Summers to former Fed Vice Chairman Don Kohn, who contended in a speech last week that the Fed may not have adequate responses if an asset bubble bursts.

NEVERTHELESS, THE BIDEN ACTIVISTS believe inflation partly stems from long-standing “anti-competitive” practices by large businesses that predate the pandemic. We would argue that the economy is in unchartered waters, coming out of an unprecedented health crisis.

THE POST ARTICLE QUOTED A HUBRISTIC White House official who predicted that companies would respond to the Washington regulatory threat by pre-emptively lowering prices. We disagree. It’s possible that companies will raise prices to pay for higher compensation costs — and the threat that regulators will become a headwind for the private sector.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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This post was first published at the AGF Perspectives Blog.