"Aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond." That's Federal Reserve Chair Jay Powell at his post-meeting press conference last week, explaining what's driving elevated prices. In fact, aggregate demand was the first thing Powell mentioned, followed by supply issues, the surge in prices of crude oil after Russia's invasion and the potential for higher inflation resulting from Covid lockdowns in China. The supply and demand imbalance was reflected in part in the first-quarter GDP report, which showed imports surged, as consumers and businesses ramped up spending and investment. "There are many factors that are adding to the inflation problem that we have today," said Shai Akabas, director of economic policy at the Bipartisan Policy Center. "And I can understand why there are some factors that the White House would want to highlight more than others." "But it's become very clear that this is both a demand- and supply-side problem that is very complex and often has nuances in different sectors of the economy," he added. How to fix it? As Powell said last week, the central bank's tools don't really work on supply shocks — they work on demand. Addressing the former is extremely difficult, and takes time. The White House has been scrambling for much of the past year to find fixes, from improving operations at ports to help unclog supply bottlenecks, to coordinating the release of oil from global stockpiles, to targeting certain sectors for what they say are unfair price hikes. Biden highlighted those efforts Tuesday, along with his broader inflation-fighting plan — you remember, the bill formerly known as Build Back Better , now refashioned as an antidote to rising prices. (That sound you hear is Washington economists collectively groaning.) The plan will help lower costs for families on everything from prescription drugs to gasoline, Biden said, and lower the deficit by taxing the wealthy and corporations. None of this was new, and it was a bit unclear what the point of the speech was, other than to hammer home that Republicans, despite their vehement criticism of the president, aren't exactly churning out policy solutions. And their alternative plan, from Sen. Rick Scott of Florida, the head of the Senate Republicans' campaign arm, has been roundly panned. To the extent Biden addressed fiscal policy's role in inflation, he touted falling deficits. "Republicans love to attack me as a big spender, as if that's the reason why inflation has gone up," he said, noting that deficits are on track to decline by $1.5 trillion this fiscal year. While it's true that the budget shortfall has shrunk dramatically — thanks to expiring Covid spending and the strong economic recovery — it's still expected to be bigger this year than the Congressional Budget Office projected in February 2021, before Congress passed Biden's $1.9 trillion Covid relief law. Is that helping to tamp down inflation? Akabas says yes, somewhat. Compared to last year, there's a lot less money pouring into the economy. But it's not clear that fiscal policy is acting as a significant brake on prices. Between a rock and a hard place — Biden's remarks underscore the tough spot the White House is stuck in, Akabas said. The most immediate way to provide relief to households is through measures like gas tax holidays or cash transfers — but those solutions also feed the problem, by driving demand, Akabas said. Meanwhile, measures that address the underlying drivers of inflation, including some of the efforts the White House has already tried, aren't as tangible or obvious to American households, and also tend to play out over a long time. "That creates a real challenge for policymakers trying to not only attack some of the root problems but also come up with solutions that sound appealing to people who you're trying to convince that you're addressing the problem," he said. IT'S WEDNESDAY — Jealous of our friend Ben White, who got a sneak peek at the soon-to-be-released Diamond Hands: The Legend of WallStreetBets last night. We know what we're doing on Sunday night. Have a tip or story idea for us? Please hit us up: kdavidson@politico.com or @katedavidson, or aweaver@politico.com or @aubreeeweaver.
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