When inflation hits your wallet, it's natural to look for someone to blame — and often, the president takes the heat. But how much control does the president really have over inflation? Here’s what you need to know about what causes inflation and who's responsible for managing it.
Inflation refers to the increase in prices for goods and services over time. When prices rise, your purchasing power decreases and your money doesn’t go as far as it used to, making it more difficult to cover everyday expenses, save money, and build wealth.
There are key economic indicators that economists use to track inflation. One of the most common is the Consumer Price Index (CPI).
The CPI measures the average change over time in the prices paid by urban consumers for a fixed basket of goods and services, including food, fuel, housing, energy, clothing, and healthcare.
According to the latest CPI data, the May inflation rate remained flat over the previous month, but rose 3.3% year over year — a deceleration from April's 0.3% month-over-month increase and 3.4% annual gain in prices.
Read more: How to protect your savings against inflation
There are several factors that can cause inflation, including changes to supply and demand, monetary policy, and supply chain disruptions.
For example, inflation can increase when there is widespread demand for goods and services, and that demand outpaces the available supply. When companies can't keep up with the demand, prices skyrocket, driving inflation.
An increase in the money supply can also cause the inflation rate to fluctuate.
“When more money exists, more money tends to be spent, which creates shortages of products and drives up prices,” said Mark Pingle, a professor of economics at the University of Nevada.
The president can influence inflation indirectly through fiscal policy. For instance, tax cuts or stimulus spending can increase consumer demand and raise the money circulating in the economy, which may contribute to inflation. Tariffs can also push prices higher by raising import costs.
However, the main responsibility of controlling inflation belongs to the Federal Reserve, the country’s central bank. More specifically, the Federal Open Market Committee (FOMC) is a committee within the Fed that is responsible for maintaining maximum employment and stable prices in the U.S. It does this by lowering or raising the federal funds rate and buying or selling securities to control the money supply in support of that goal.
The president has some influence here as well, as they are responsible for nominating the seven members of the Board of Governors who serve on the FOMC and oversee the 12 Reserve Banks.
However, it’s important to note that the Fed operates independently of the White House; monetary policy decisions are made based on long-term economic objectives, not short-term political pressure.
Read more: How much control does the president have over the Fed and interest rates?
Rising inflation can have a negative impact on your own personal finances. Pingle explained that inflation is a lot like an income tax because it reduces your buying power. “When the government acts in ways that generate inflation, it does not take your money, but it has the same effect because you are less able to buy,” he said.
For example, say you head to the grocery store for eggs, milk, and bread. The total cost of your groceries is $10. However, when you return to the store next month to buy the same items, the total cost is now $12 due to inflation. That $10 doesn’t go as far as it used to, and more of your income is needed to cover the same essentials.
When inflation is high, it’s important to take steps to mitigate the negative impact on your budget:
Cut out non-essential spending: When prices are higher than normal, looking for ways to free up some cash flow is a good first step. Review your budget and recent bank statements to get a better sense of where each dollar is going. Then, see if there are areas where you can afford to cut back. That way, when essential expenses increase in price, you have the extra money in your budget to cover it.
Look for ways to boost your income: When your monthly expenses increase, you may need to find ways to earn more so your income keeps pace. You might consider making the case at work for a raise or promotion, picking up a side gig, or turning your clutter into cash by selling items you don’t use anymore.
Rethink your savings strategy: Paying more for your regular expenses could mean having to scale back on how much you set aside for savings. However, with the right type of bank account, you can ensure the money you do have saved works harder for you. Check out our lists of the best high-yield savings accounts and CDs that can help your balance grow with today’s top interest rates.
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