We have been detailing the Biden Administration’s record in terms of inflation and real wage growth starting in January 2021. On February 12 2025, the Bureau of Labor Statistics (BLS) released data on the CPI through the month of January 2025, allowing a retrospective look at the past four years of inflation – and real wage growth – during the Biden administration. The year-over-year CPI inflation rate came in at 3.0%, still well above the Fed’s target of 2% inflation, and the highest reading since May of 2024. The monthly rate came in at 0.5%, which would be an annual rate of 5.8% if maintained for twelve months. Needless to say, the inflation that was established early in the Biden administration was never completely ‘won,’ and it is now passed on the Trump Administration.
Looking back on the last four years, the Biden Administration started in January 2021, and in February 2021 the year-over-year inflation rate stood at 1.7%, the only month of the Biden administration with inflation below the 2% Fed target. In March 2021, the inflation rate was measured at 2.6%, and by April it was 4.1%. The inflation rate continued to climb over the next year, reaching its high point of 9.0% in June 2022. Early in the climb, in the summer of 2021, inflation was already above 5%, and the Fed and various members of the Biden Administration rather infamously labeled the inflation as transitory. Treasury Secretary Janet Mellon said, in June 2021, that "We have in recent months seen some inflation, and we — at least on a year-over-year basis — will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent. I personally believe that this represents transitory factors." President Biden himself, in July 2021, used the word ‘temporary’ to describe the inflation rate.
Over the next year, inflation rose to hit that 9% mark in June 2022.
The Fed, and administration officials, finally conceded that inflation was an ongoing problem, one that was not exactly transitory, in the fall of 2021. Inflation rates were by then above 6%. But the Fed, despite acknowledging the inflation problem, waited until March 2022, when the inflation rate was well above 8%, to begin raising its monetary policy rate, the interest rate on reserve balances. This rate increased from 0.15% to 0.4% in March 2022, as the Fed began a long series of increases in the policy rate that extended to July 2023, when the policy rate hit 5.4%. It is unclear why the Fed waited so long to act. When the inflation rate peaked in June 2022, the policy rate was 0.9%.
From June 2022 onward, the inflation rate began a long slow decline, and by June 2023 the inflation rate was 3.1%, although that was followed by two months at a 3.7% rate. In July 2023, the Fed made its last increase in the policy rate, which hit 5.4% that month.
From June 2023 to June 2024, the inflation rate ranged from a high of 3.7% to a low of 3%. In September 2024, when inflation was measured at 2.6%, the Fed decided to lower its policy rate to 4.9%, an action that at least implicitly signaled a sort of victory in the fight to restore inflation to its 2% target. In November, the Fed reduced its policy rate again to 4.65% as the inflation measure came in at 2.7%, and in December, the Fed again reduced its policy rate to 4.4%, as inflation came in at 2.9%. That brings us to January 2025, the final month of the Biden Administration and the beginning of the Trump Administration, with inflation at 3.0%.
This record of inflation is accompanied by a record of a decline in real (or inflation-adjusted) wages. From January 2021 through January 2025, the Biden Administration saw a rise in wages of 19.9% and a rise in prices of 21.5%. Average hourly earnings adjusted for inflation actually declined by 1.3% during these four years.
The real wage story is a story of two trends, as shown in Figure 1. First, there is the initial period from January 2021 until June 2022, with inflation accelerating from 1.7% to 9.0%. Prices rose 12.3% in those 17 months while wages rose 7.3%, so workers saw a rather large 5% decline in the purchasing power of their wages. It is little wonder that citizens do not like inflation! Then, from June 2022 until January 2025, prices continued to increase but at a noticeably slower rate, so that by January 2025 prices had risen to be 21.5% above their level in January 2021. Meanwhile, wages from June 2022 until January 2025 continued to rise at nearly the same steady rate, and by January 2025 they were 19.9% above the level they started at in January 2021. Over the period June 2022 to January 2025, workers saw fairly steady small increases in their purchasing power, but nowhere near enough to make up for that 5% decline in the first 17 months of the Biden Administration. The final result, an overall 1.3% decline in real wages, shows the destructive impact of this inflationary period on the purchasing power of worker wages.
One can also look at monthly changes in the price level, monthly inflation rates. Monthly inflation rates are often presented as annualized monthly inflation rates by taking the monthly measure and showing what would happen if that measured monthly rate continued for an entire year. In January 2025, the monthly change in the price level was 0.5%, implying an annualized inflation rate of 5.8%. These monthly annualized rates are quite volatile, and the measure in any one month should be interpreted with caution, although trends over several months can be informative. Unfortunately, the trend in these monthly annualized measures has been steadily upward since June 2024. The measure in July was an encouraging 1.7% annualized rate, but it has risen almost steadily since then, hitting 2.8% in September 2024 when the Fed first started its policy rate cuts, then 3.4% in November and 4.5% in December, before hitting its current 5.8%. This upward trend in monthly rates is troubling, to say the least.
Figure two plots the CPI inflation rate both year-over-year and the annualized monthly rates. The pattern of rising year-over-year rates from January 2021 through June 2022 is clear, as is the long slow decline to the current readings in the 3% range. The more volatile monthly annualized rates also show the high monthly rates during the January 2021-June 2022 period, and the lower values since then. One can also clearly discern the upward trend in these monthly annualized rates over the last six months.
The BLS also releases data on an alternative measure of the CPI, the so-called Core CPI or CPI Less Food and Energy Prices. Inflation measured from the CPI is often called ‘Headline Inflation,’ to distinguish it from a second measure based on the Core CPI. Inflation measured using Core CPI is often called ‘Core Inflation.’ While the CPI measures the cost to a household of purchasing consumer products including food and energy, the core measure excludes food and energy spending on the grounds that prices for these goods are volatile and often revert to a long-run level. While controversial, there is a frequent claim that core inflation is a better predictor of future inflation than is headline inflation. Consumers obviously feel the sting of headline inflation, but policymakers may want to look at core inflation to provide a better idea of how future inflation rates will unfurl. The Federal Reserve, for instance, makes projections of both PCE inflation and a core-PCE inflation rate.
The year-over-year core CPI inflation rate came in at 3.3% in January, higher than the headline inflation rate. The one-month change in the core CPI for January implies an annualized monthly inflation rate of 5.5%. If core inflation is a better predictor of future headline inflation, then the long period since spring 2023 when core inflation has been above headline inflation should also be troubling for the Fed.
So, what’s next? The historical record of the previous administration is clear. The record of the new Trump Administration is just beginning. But the inflation threat is already present. Inflation remains above the Fed’s 2% target, and it shows signs of accelerating over the past six months or so. The Fed seems to have acknowledged this reality, and altered its prior plans to continue cutting its policy rate.
At the same time, the Fed seems to have a bias against raising rates, and in favor of cutting rates. The Fed delayed raising rates until March 2022 even after acknowledging in the fall of 2021 that inflation was not a transitory problem. Then in 2024, with inflation still above target and with some indications of future upward movement, the Fed moved forward with three rate cuts. Furthermore, the Fed has embraced an average inflation targeting strategy but made clear, at least by its actions, that this strategy is one-sided. Periods of low inflation – inflation below 2% -- will be made up by periods of high inflation, but periods of high inflation will not be made up by periods of low inflation.
The first Trump Administration was not known for fiscal constraint, and the Biden Administration followed suite. Whether the second Trump Administration will chart a different course remains to be seen. Certainly, there will be continued pressure on the Fed to keep its policy rate low in the hopes of also keeping interest rates low on the ever-growing federal debt. One key question is whether the Trump Administration is willing and able to get the ongoing federal deficit under control. A second question is how successful will the Fed be in resisting pressures to allow above-target inflation rates.