President Biden used his State of the Union address to refocus the nation on how far the economy has come since the pandemic recession. But he also highlighted his plans to slow down rapid price hikes, underscoring the challenge Democrats face in the run-up to the midterm elections: inflation is painfully high, voters aren’t happy about it, and the most tried and true way to avoid price hikes. to cool is harming growth and the labor market.
Mr Biden took a defiant tone in the face of that bleak outlook, urging his administration to take steps — including encouraging competition from businesses and strengthening a supply chain that is struggling to meet consumer demand. – to slow down price increases without cutting and paying employment.
“One way to fight inflation is to cut wages and make Americans poorer,” said Biden, describing the way central bank policies work. “I think I have a better plan to fight inflation.”
The challenge is that White House policy has historically served as a backup line of defense when it comes to controlling inflation, which is primarily the job of the Federal Reserve. The central bank is prepared to act quickly in the coming months to raise interest rates, making borrowing and spending more expensive. Higher rates are intended to slow hiring, wage growth and demand enough to slow price increases.
It is possible that inflation would decline so much this year alone that the Fed will be able to gently slow the economy down towards a sustainable path. But if price increases remain rapid, inflicting economic pain is the Fed’s playbook for fighting overheating.
That makes inflation — which is the fastest in 40 years — a major liability for the Biden administration, one the president repeatedly addressed Tuesday night, calling his “top priority.” It undermines consumer confidence by shredding paychecks and causing a sticker to consumers trying to buy groceries, banks or used cars. And the remedy could hinder a solid economic recovery just as Democrats try to cast their vote for reelection to voters.
“The biggest problem for President Biden is that there’s no good way to signal inflation,” said Jason Furman, a Harvard economist and former White House economic official during the Obama administration. “He can’t do much about it, but he can’t come up and say, The only solution here is patience and the Federal Reserve.”
Mr. Furman said that while the kinds of solutions the president put forth—ideas to improve supply chains and expand job opportunities—the government should be doing “the right things,” the nation should not “be under the illusion that it is going to add up to a lot” in terms of cooling off rapid price gains.
Mr Biden said his administration would begin a “crackdown” on ocean shipping costs, which have skyrocketed during the pandemic. He suggested that the administration wanted to reduce the cost of prescription drugs, a constant pressure from him.
While repeatedly citing the increased costs faced by consumers, the president also tried to draw attention to the economic victories of his tenure so far, which significantly strengthened the job market.
The economy has added 6.6 million jobs since Mr Biden took office, the unemployment rate is expected to fall below 4 percent and growth has been faster than many other advanced economies. The strength and scope of the recovery has surprised economists and policymakers, who have often rolled out credit aid packages under the Trump and Biden administrations to fuel such a rapid recovery.
But some economists warned last year that the $1.9 trillion legislation the government passed through Congress in March 2021 was too big, too ill-targeted, and that it would boost demand and help fuel rapid price hikes. stir up. While fiscal policy was not the only reason inflation picked up last year, it appears to have contributed to high prices by encouraging more consumption.
As flush consumers spent a lot of money in 2020 and last year, and home-bound shoppers bought more goods like armchairs and computers instead of services like manicures and dining out, supply chains struggled to keep up.
Virus outbreaks continued to close factories, ports became clogged and there were not enough ships to navigate. In particular, the perfect storm of strong purchases and limited supply pushed car prices up sharply, caused consumers to wait months for new dining room sets and made luxury bicycles more difficult to find and afford.
And now inflation has gone beyond only those goods affected by the pandemic.
The costs of food, fuel, housing, vacations and furniture are all rising rapidly – and as the conflict in Russia threatens to push gas prices further in the coming months, the situation is likely to worsen before it gets better.
While the White House downplayed falling prices last year, arguing that they would disappear with the pandemic as tumultuous global supply chains set themselves up, nearly a full year of high inflation readings proved too much to ignore. Rising costs are eating into paychecks and pushing Biden’s polls to the lowest point so far in his presidency.
“I don’t think it will go away in a way that will save the incumbent in November,” said Neil Dutta, an economist at Renaissance Macro Research. “While the job market is quite strong, it’s not enough to keep up with the shock people are feeling regarding inflation.”
The Fed is expected to raise interest rates from near zero at its meeting this month, and officials have indicated it will make a series of hikes throughout the year to bring inflation under control.
The central bank sets policy independently of the White House, and the Biden administration doesn’t talk about monetary policy out of respect for that tradition. But the timing can be politically tricky. The Fed could trigger an economic slump to coincide with this fall’s election season, dealing a double whammy for Democrats, with central bank policies slowing labor progress even as inflation hasn’t fully died down.
That could be especially true if the conflict in Ukraine pushes fuel prices up, fuels inflation further and makes consumers expect rapid price increases to continue, some economists said.
“The Fed needs to be more aggressive on inflation,” said Diane Swonk, chief economist at Grant Thornton. “It could bleed into unemployment by the end of the year.”
Mr Furman said he thought the Fed’s actions were more likely not to cause too much pain this year, although they could put pressure on the job market in 2023. And Mr. Dutta speculated that the Russian invasion of Ukraine’s central bank slightly lower, at least in the short term.
“The Fed basically has a choice: they can either sink the economy into recession, or they can let inflation pick up a little bit,” Dutta said. “They’re not going to risk a recession with the geopolitical situation we’re in.”
The overseas conflict could also give Mr. Biden and the Democrats a moment of patriotism to take advantage of. So far, Mr Biden’s sanctions have been well received by voters, based on the results of an ABC/Washington Post poll.
At the same time, higher gas pump prices as a result of the conflict could further erode consumer confidence. Sentiment has swooned as price increases have risen and usually responds very well to fuel costs. The price of a barrel of gas climbed above $100 on Tuesday, its highest since 2014, based on a popular benchmark.
The question is whether, given rising costs, the administration will be able to turn the bright spots – international cooperation and the pace of recent job growth – into something eye-catching for consumers and voters.
The answer may depend on what happens next.
Annual price increases are expected to slow down in the coming months, as measured by last year’s relatively high numbers, and as supply chain delays ease somewhat. They could moderate even more later this year if current high commodity prices fall again, in the most hopeful scenario.
If inflation moderates on its own and a relatively small Fed response is enough to push inflation back further, the economy could be left with strong growth, a booming labor market and a positive outlook for 2023.
Increasingly, however, inflation is expected to decline more slowly.
Economists at Goldman Sachs think the consumer price index inflation could end at 4.6 percent in 2022, more than double the level it hovered before the pandemic. That would mean a slowdown — the measure now stands at 7.5 percent — but it would be much higher than what the Fed normally targets.
That would allow the administration to talk about moderation in price increases, but it may not feel like a significant improvement for consumers as they go to the polls.
“Inflation is always political, because it burns, even in a good economy,” said Ms Swonk. “It creates a feeling of chasing a moving target, which nobody likes.”
