What Can the Government Do to Reverse Inflation?

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In the United States, the inflation rate hit reached 8.6% in May 2022. While the Federal Reserve once again raised interest rates in response – and likely will again through the rest of the year and into 2023 – most consumers haven’t seen any relief from these efforts.

While wages rose an average of 5% year-over-year as of the end of the first quarter of 2022, the inflation-adjusted value of pay actually fell 3.3% due to inflation. That’s led many Americans to wonder what the government can do to right the proverbial ship, as the current course could push many households to the brink even if they’re actively budgeting for inflation.

In most cases, it’s only natural to hope that the government would have a lot of available tools to mitigate inflation and lower costs back to more manageable levels. However, its capacity to do so may be more limited than you might expect. Here’s a look at what the government can do to reverse inflation.

Encourage the Federal Reserve to Continue Raising Rates

While the Federal Reserve is autonomous in many ways, it does answer to Congress and is accountable to the public. As a result, the government can essentially push the Federal Reserve to move forward with additional interest rate hikes.

When the Federal Reserve raises interest rates, this discourages borrowing and encourages saving. Essentially, it makes managing debt more difficult for consumers and companies, particularly for new debt accounts or existing accounts with adjustable rates, because borrowers end up paying more in interest over time. When repaying the debt comes with a higher price tag, it makes it a less appealing and viable option.

Additionally, as rates on loans rise, so do interest rates on many savings accounts. This can lead consumers to stash more money. That keeps cash from circulating as freely. In turn, this can reduce demand for goods in many product and service categories. When that occurs, prices often drop down to entice consumers to buy, which can slow, stop or even reverse inflation.

However, these moves take time to alter buying habits. Prices won’t decline overnight — or even potentially with the next rate increase or two. However, they do eventually make a difference.

Make Changes to Lower Fuel Prices

In early June 2022, the average price of gas across the United States hit $5 per gallon. California had been sitting well above $6 per gallon for more than a month, and areas with the lowest prices were still near $4.60 per gallon.

Rising gas prices are a major component of the inflation equation. Along with impacting consumers directly when they head to the pumps, these inflated prices push the costs of transporting goods higher. As a result, prices on various products go up as companies look to offset their own rising transportation expenses.

Generally, the government has a few options to attempt to lower fuel prices. Here’s an overview of some of what’s on the table.

Encouraging Oil Companies to Increase Production

Encouraging oil companies to ramp up production is one option, as a larger available supply leads to reduced prices at the pumps. While this is likely viable, it requires cooperation from various oil-producing nations, some of which may not be inclined to make the move.

Additionally, this option to reverse inflation relies on there being enough refining facilities to create gasoline. Because many refiners shut down during the pandemic, getting enough back online to increase production could be challenging at best.

Releasing More Fuel from the Strategic Reserve

Releasing fuel from the strategic reserve — sort of an emergency fund of petroleum to be used when there are disruptions in the normal supply chain — is another potential move. This increases supply and uses a local source as the supplier, which can bring down prices. However, it also means depleting what’s essentially an emergency resource.

At the end of May 2022, President Biden announced the release of 1 million barrels of oil per day, with the intention of doing so for six months. Whether or not releasing a higher amount could make more of an impact isn’t clear, but it may be an option that comes to the table later on.

Suspending Federal Fuel Taxes

One proposal from the Biden administration for countering rising fuel prices is a short-term suspension of federal fuel taxes. While it isn’t clear whether there’s enough support in Congress for this to move forward, it would reduce gas prices by 18 cents per gallon for regular gasoline and 24 cents per gallon for diesel fuel.

Offering Gas Rebate Cards

A gas rebate card is another Biden administration idea in discussion, though it may not be particularly viable. It isn’t clear how much these rebate cards would be worth or which households would be eligible, but it could potentially reduce the burden of rising prices should the administration move forward with this idea.

Reducing Oil and Gas Industry Restrictions

Some also argue that reducing restrictions on domestic oil and gas development is a potential answer. The theory is that changing some of the limitations could boost local fuel production, alleviating some of the burden created by the Ukraine-Russia War in the process.

Russia is a major global fuel supplier. As various governments imposed restrictions and took positions opposing Russia’s actions following the country’s attacks on Ukraine, Russia responded by cutting off gas shipments to those countries. This created supply challenges. With a larger local supply, there’s less dependency on foreign oil, which could potentially alleviate some pressure and reverse inflation.

Repeal Trump-Era Tariffs on Imported Goods

Tariffs work like targeted taxes on imported goods. Also called duties or levies, they’re designed to raise money for the U.S. government. Their presence can also encourage shoppers to purchase American-made products. Tariffs usually increase the sale prices of imported items, making locally produced items more competitive.

That means repealing certain tariffs put in place by the Trump administration is also a potential solution. This would reduce the price of imports, which could make some products more affordable for consumers.

It could also potentially lead American companies to look for ways to bring their prices down to ensure they remain competitive. The ways this might play out would depend on whether a company was open to (and could support) smaller profit margins or if there were other ways to lower the price of a product, such as sourcing materials from another supplier.

However, this approach could come with risks. Because high demand can lead to inflation, reducing costs to the point where consumers continue to spend instead of save may prevent the decision from having the desired effect.

Will Inflation Subside Anytime Soon?

Ultimately, these potential changes would take time to make an impact on inflation and prices. Additionally, some of the options are merely proposals or ideas; they aren’t actively part of the equation for lowering inflation just yet. As a result, it isn’t clear how long inflation will persist. It’s wise to assume the process to reverse inflation may take longer than we anticipate.