Will a Korean War Law Help With Inflation? Don’t Count On It.

This article was originally written by Megan Leonhardt for Barron’s and can be found on their website here.

The Biden administration is revisiting the Covid-19 pandemic playbook to strengthen supply chains and lower drug costs. Yet there is skepticism that the latest White House actions will help to meaningfully tamp down overall inflation.

The White House announced Monday the formation of a new Council on Supply Chain Resilience that aims to increase the flow of key goods to help relieve upward pressure on prices. As part of that effort, the council plans to use the Defense Production Act (DPA) to boost manufacturing and distribution of essential medications.

The law, which was originally passed to bolster supplies and equipment production during the Korean War, was recently used to expand the supply of ventilators and personal protective equipment during the Covid-19 pandemic in early 2021.

Along with the use of the DPA, the new initiative also includes more than $1 billion in investments by federal agencies to improve domestic food, energy, and defense supply chains. At the same time, the Department of Defense plans to release reports on reducing reliance on high-risk foreign suppliers within pharmaceutical supply chains and on establishing a National Defense Industrial Strategy.

Yet the White House’s actions will likely have little impact on the U.S. inflation rate in the near term, which still remains at 3.2% year over year —well above the Federal Reserve’s 2% goal. “This is unlikely to have any material effect on the inflation rate,” said Paul Bracken, professor emeritus of management at the Yale School of Management.

Data and anecdotal evidence indicate that pandemic-era supply side problems are largely behind the U.S. at this point. The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index, which climbed to a record level in November 2021, fell to its lowest yet last month. That suggests that the White House’s supply-chain support won’t do much to return inflation to the Federal Reserve’s 2% target.

“At this point, it seems like the supply chain is not the biggest cause of high inflation. A lot of those problems have, thankfully for everybody, worked themselves out,” said Maxwell Shulman, a policy analyst with the Washington, D.C.-based independent policy research firm Beacon Policy Advisors.

Bracken said that while there may be some leftover supply issues within the pharma sector, they would likely be solved over the next few months by market forces without any need for government interference. And recent shortages of weight-loss drugs like Wegovy and Saxenda, for example, are driven more by soaring demand, rather than supply-chain issues.

In fact, net price growth for pharmaceuticals has been slower than gains in the consumer price index in recent years as drug companies have found the right balance to avoid much of the headline risk—and outrage over the cost of certain medicines—seen last decade, said Aryeh Sand, a managing director at Solomon Partners.

In many ways, Bracken and Shulman said, Monday’s announcement is about the administration appearing to do something to address Americans’ concerns about the high cost of medication.

“The optics are almost more important than the action itself,” Shulman said. “Winning the fight for public opinion on the economy is the biggest battlefield of the [2024 presidential] election.”

And at the moment, Americans have a fairly pessimistic view of the economy, despite low unemployment and slowing inflation. The Conference Board’s latest sentiment data, released Tuesday, showed consumer confidence rose in November, but only because the October reading was significantly reduced. November’s figures were below September’s and remain in recession territory.

While Monday’s actions are unlikely to fix stubbornly high overall inflation, the announcement is not unimportant—and focusing on the production and transportation of goods is a good place for the administration to start in tackling the cost of drugs, said Javier Palomarez, founder & CEO of the United States Hispanic Business Council.

“If businesses can start to pay less for the production and transportation of their goods, they are afforded the opportunity to lower prices for the end consumer,” Palomarez says. “Healthcare costs have historically been a financial burden on Americans, and prices continue to live at unprecedented rates.”

Write to Megan Leonhardt at megan.leonhardt@barrons.com