Sunday, January 16

Inflation threatens to return to American politics in 1980 replay

“Is it easier for you to go shopping at the stores than it was four years ago?” Ronald Reagan asked days before his landslide victory in the 1980 presidential election. That simple question looms as a deciding factor in next year’s Congressional vote.

Inflation is now at its highest level in a generation, with a report on Wednesday showing that consumer prices rose at an annual rate of 6.2% in October. Almost all economic forecasters expect it to cool down next year, but the key question for President Joe Biden and Congressional Democrats is how fast and how much.

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While Biden argues that inflation will come down with his upcoming $ 1.75 trillion social spending bill, along with a $ 550 billion infrastructure plan he will soon sign, Republicans are hammering the exact opposite argument: Government cash falls are driving up prices. Even some Democrats echo the GOP’s fiscal concerns, complicating the prospects for the pending legislative package.

What is at stake in the speed with which inflation is reversing and in the debate over the cause and remedy of the price escalation is in the control of Congress. In the midterm elections next November, tiny Democratic majorities in both houses will be at stake. In fact, it is the first national election in which inflation will be a paramount issue since Reagan’s victory over President Jimmy Carter.

“We’ve never had so many people talking about high home prices or high appliance prices or high TV prices,” said Richard Curtin, who oversees the University of Michigan Consumer Sentiment Survey, a key indicator of consumer attitudes. homes. “We have a lot of people talking about lowering their living standards due to inflation,” made worse because “consumers don’t see effective economic policies that curb inflation,” he said.

Treasury Secretary Janet Yellen said in an interview that aired Tuesday on National Public Radio’s “Marketplace” that she expects inflation next year to be “closer to the 2% we consider normal.”

Outside forecasters largely agree. The median estimate of economists surveyed by Bloomberg is a rate of 2.8% in the third quarter of next year, on the eve of the elections, with 2.4% seen for the last three months of 2022. Futures of Gasoline is trading about 18 cents per gallon lower for next October compared to current levels, indicating that pump prices should decline.

But much depends on the course of the pandemic, and things can get worse before they get better, with no guarantee that supply chain bottlenecks have been fully cleared. Meanwhile, rising prices at the supermarket checkout lines and the gas pump are already unsettling the public, and much of the country will see further shocks when winter heating bills start rolling in.

And even if headline inflation declines, some costs could continue to rise. Economists at Goldman Sachs Group Inc. expect rent increases next year to hit 30-year highs. The latest outlook from the Wall Street bank points to inflation at a historically high rate above 4% in the third quarter.

Rental earnings are still pending

Biden said Wednesday that he had directed top economic advisers to focus on reducing energy costs and pointed to the role of the Federal Reserve in controlling prices. He also asked regulators to be on the lookout for any “price increases.” During a stop in Baltimore, he highlighted the benefits of his infrastructure bill as part of “a plan to finish the job of getting us back to normal” after the pandemic.

But most economists do not see a short-term impact on inflation from fiscal packages. Infrastructure projects can take years to affect transportation and other costs, for example. And increased support from the social safety net could, in the meantime, add fuel to already strong demand.

“Spending is charged up front,” said Jason Furman, a former senior economic adviser to the Obama administration who is now a professor at Harvard University.

Inflation could be boosted “a few tenths of a percentage point” next year, he said. In the long run, any impact from inflation would be “miniscule” and could work in either direction.

With US payrolls about 4 million lower today than before the pandemic, the biggest impact on inflation over the next year is likely to be how quickly people are returning to the workforce, Furman said. “Inflation at this time is more uncertain than at any other time in many decades. We are in an unprecedented situation that our greatest lesson from last year should be the humility in our forecasts ”.

A key Democratic Senate voter, Joe Manchin of West Virginia, is concerned enough that he has delayed consideration of the social spending bill that the White House and Congressional leaders are trying to enact. You have yet to commit to voting on the draft package.

Republicans have spent months focusing their fire on portraying the Democrats’ pandemic aid bill, signed in March and costing $ 1.9 trillion, and the upcoming social spending plan as inflationary.

For now, they are managing to link Biden to the price hike – a low bar as voters often blame the incumbents for inflation. As of mid-October, 62% of Americans said the president’s policies are responsible, according to a Politico / Morning Consult poll.

Democrats are now in a race to show voters for next November that they are gaining more ground from a growing economy and Biden’s $ 1.75 trillion Build Back Better initiative than they are losing by the price increase.

It may take a while for voters to feel the impact of some iconic pieces of that package, which has yet to be approved by Congress. Items like the expanded child tax credit immediately put money in people’s pockets, though that simply continues an increase in income that families with children have been receiving since July. Some other high profile pieces are more complicated.

Cindy Lehnhoff, director of the National Child Care Association, a trade group of licensed private child care centers, highlighted the importance of subsidies from legislation that limit child care costs to 7% of income for families who they earn up to 250% of the state median income, or about $ 251,000 for a family of four in New York State.

But the federal government will first have to make rules, and states will have to write their own plans for the program. In addition to the bureaucratic reasons for the delay, child care centers will need to expand their staff.

“I think most states will still be in the planning process, frankly, on how to run this” for next fall, Lehnhoff said. “If I ran for office, I wouldn’t depend on it.”

© 2021 Bloomberg

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