Q&A – How Far Off Were Economists on Inflation in Biden’s First Year vs. 2025?
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Today’s entry: Hey Brian, I almost never miss a show. You made a really good point about economists underestimating inflation during President Biden’s first year while overestimating inflation throughout this year. Please break this out for us so we can share it. Thank you!
Bottom Line: Today’s question dovetails with an observation I made in yesterday’s takeaways, specifically that economists consistently and woefully underestimated inflation during President Biden’s administration, while consistently overestimating inflation in Trump’s current administration. Let’s dive into the data to unpack this...
In 2021, as you’ll likely recall, economists missed the mark by more than just a little bit on inflation. Federal Reserve Chairman Jerome Powell was so flippant about the prospect of higher inflation under the Biden Administration's year one policy, that he infamously, and repeatedly called it “transitory” throughout 2021, only dropping the characterization near the end of the year when inflation had already surged to 40-year highs.
During the first year of the Biden administration the Fed projected headline inflation, the CPI, at 2.2% for the year. The actual CPI inflation for 2021, per the Bureau of Labor Statistics, came in at a blistering 7.0%. That’s an underestimate of 4.8 percentage points—or in other words they missed by 318%. Of course it only later got worse with inflation peaking at 9% in 2022 – meaning the Fed missed what their perceived inflation peak would be by a total of 6.8%! The Fed was so bad at it’s projections and characterizations that the Chief Economic Advisor to Allianz called the “transitory” terminology by the Fed “the worst inflation call in the history of the Federal Reserve”.
The miss was said to have stemmed from economists’ consensus that inflation would be “transitory,” driven by temporary factors like supply chain bottlenecks, stimulus-driven demand from the so-called American Rescue Plan, that did anything but, and surging energy costs – related to Biden administration policies. Predictably, though not by the Fed and leading economists, pressures proved persistent, catching forecasters flat-footed as inflation surged to levels not seen since Captain Peanut was still on the scene.
Now, let’s contrast that with 2025 through July, where the script has flipped. Rather than historically underestimating the impact of inflation...the Federal Reserve, still led by Jerome Powell, and the same “leading economists” have managed to be consistently wrong yet again. Only this time going the other way. Five out of the first six full months of President Trump’s second administration the Fed has overestimated the rate of inflation (they were right on the one occasion), for a cumulative miss overestimating inflation by a half of one percent.
These overestimates are said to reflect expectations of stronger price pressures, from anticipated tariff policies under discussion in 2025, which haven’t materialized. Unlike 2021’s supply shocks and stimulus overload, 2025’s inflationary environment is more stable, with tighter Fed policy and easing global supply constraints keeping inflation closer to the Fed’s 2% target. On that note...
Perhaps most notably the Federal Reserve’s stated target rate for inflation is 2%. While the inflation rate has fallen from 3% to 2.7% via the Consumer Price Index, the annualized inflation rate of only President Trump’s first six months is 1.9%. The lowest inflation rate since Trump was previously president and a full point lower than where the Fed projected it would be. And the reason this matters of course, is interest rate policy.
Just as the Federal Reserve wasn’t aggressive in raising interest rate policy early during the onset of ‘Bidenflation, the Federal Reserve has refused to budge on lowering interest rates because their projected inflation rate is above their target rate. However the real inflation rate of Trump’s six months has actually been below their target and still here we are without the Fed showing any indication that they’ll even consider a cut on interest rates until their meeting September 18th – over a month away.
The non-conspiratorial explanation for why the Federal Reserve continues to overestimate inflation during this administration, would be their historically incompetent underestimating of it during the previous administration. In other words, perhaps they’re overcompensating for the previous failures. That’s entirely plausible. Many others thing that’s there’s something else to it. Just for drill I ran a probability for the same economists to miss as they did in 2021, at the level that they did, and in 2025 at the level and direction that they have and what came back was that the odds are effectively zero. You can do with that what you will.