Biden will have to be patient with inflation

Customers line up to checkout at a grocery store in San Francisco, California, US, on Thursday, November 11, 2021.

David Paul Morris | Bloomberg | Getty Images

After years of dormancy, inflation is again damaging the American wallet, and it has become a major concern for the White House.

In recent months, the Biden administration has stepped up efforts to address supply chain disruptions that economists blame for high inflation. And President Joe Biden has pushed through his economic agenda as a remedy for inflationary concerns.

But ask investors, economists and the American people what they think about inflation, and no one sees inflation cooling any time soon. That means everyone from the president to the common voter will probably need patience to get through this.

“I don’t think you want to promise people that inflation is going away,” said Jason Furman, an economist and former chairman of the White House Council of Economic Advisers during the Obama administration.

“I think the hardest thing to communicate is that not every problem has a solution. Part of what we need to do to recover our economy is be patient,” he continued. “That’s a very difficult message for any president to deliver. They should be seen as things they do.”

The politics of prices

Rising food and gas prices weigh on Americans living on fixed or modest incomes. Retail food prices were up 1% in October, laundry and dry cleaning costs are up 6.9% from a year ago, and in some parts of California, gasoline is trading north of $6 a gallon. sold. General Mills has informed retailers that it plans to raise prices soon for dozens of its brands, including Cheerios, Wheaties and Annie’s, according to a report published Tuesday.

The inflation reports coming out of the White House, in turn, have drawn a lot of attention to two large Biden-backed bills. One of the president’s favorite counters to inflation worries is pointing out that many economists say his $1.75 trillion Build Back Better bill and a separate $1 trillion infrastructure plan will make businesses and workers more productive and reduce inflationary pressures on the economy. will ease in the long run.

But while better roads, access to childcare and weathering could help cut costs in the future, Democrats face crucial midterm elections in less than 12 months.

Inflation appeared to be a hurdle for Democrat Terry McAuliffe, who lost to Republican Glenn Youngkin in the recent Virginia gubernatorial election.

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Political strategists viewed that election as a gauge of voters’ attitudes toward the current direction of policy, with Democrats in control of the White House and Congress. The high-profile Democratic defeat in an increasingly blue Virginia is said to have led to a compromise between party centrists and progressives on infrastructure and anti-poverty and climate laws.

Americans’ fears about the economy, as measured by the percentage of respondents who cite an economic problem as the US’s biggest problem, peaked in the pandemic era, according to polling agency Gallup. (The survey surveyed a random sample of 815 adults and had a margin of error of plus or minus 4 percentage points.)

Twenty-six percent of Americans now cite an economic problem as the country’s biggest problem, while 7% say inflation in particular is their biggest fear. In September, just 1% of Americans cited inflation as their top concern, Gallup said. It’s been more than 20 years since inflation was cited as the number one problem by at least 7% of Americans.

“Moms and dads are concerned and asking, ‘Will there be enough food we can afford to buy for the holidays? Can we get the Christmas presents to the kids on time?'” Biden said in a speech on Tuesday.

No major impact on gas

To cut fuel costs during the holiday season, Biden announced that the US and some of its allies will tap into their national strategic petroleum reserves.

“The fact is, in the past decade, we’ve seen even the worst spikes,” Biden said of rising gas prices. “But it doesn’t mean we have to sit idly by and wait for prices to fall on their own.”

While the Biden administration said it would bring 50 million barrels of oil from government stocks onto the global market in the coming weeks, some analysts warned that the move likely amounts, at best, to an attempt to pacify consumers.

Tapping into the country’s oil reserves will have a limited impact on fuel costs, as “almost 40% of the 50MM bbl release was already planned for 2022, as well as the fact that much of the oil will simply go into commercial stockpiles”. wrote Tom Essaye, founder of Sevens Report, a market research firm.

That oil will eventually be bought back “and later returned to the SPR, meaning the move is largely symbolic and won’t have a major impact on the actual physical markets,” he added.

Furman, who teaches economics at Harvard University, agreed. He said signing on the SPR falls into the “no stone-left-not-inverted” category for a White House concerned about the political impact of rising prices.

Current inflation, he said, is a function of broad shifts in aggregate demand and aggregate supply — beyond the influence of a one-time appeal to the SPR or other quick fix.

Inflation expectations

One annoying feature of inflation is that today’s price increases are a product of what people think tomorrow’s prices will be. In other words, inflation expectations can cause inflation on their own.

According to the Federal Reserve Bank of New York’s most recent consumer survey, median inflation expectations rose to 5.7% for the coming year in October, the highest level ever since the series began in 2013.

A measure of investors’ inflation expectations for the next five years has risen sharply in recent months.

The difference between the yields on five-year Treasury inflation-protected securities, or TIPS, and the corresponding Treasury Notes reached 3.17 Wednesday, the highest level since at least 2003. That basically means investors think inflation is about 3% on average. will be over the next five years.

The recent rise in market-based inflation expectations caught the attention of Federal Reserve officials at their November policy meeting. Their minutes, released Wednesday, showed that some central bankers viewed the jump as evidence that rising inflation forecasts are beginning to become mainstream.

“A number of participants pointed to increases in survey-based and market-based inflation expectations — including the notable rise in the five-year TIPS-based inflation offset measure — as possible signs that inflation expectations were becoming less anchored,” the statement read. Fed minutes read.

“I’ve taught my students the model that would have helped them predict inflation this year. And that model is that if you have way too little demand, extra demand can help,” he said.

“But if you try to push it too far, you run into a supply constraint,” he continued. “You get higher prices instead of larger quantities.”

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