Inflation will weigh on the State of the Union tonight
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President Biden is expected to devote much of his State of the Union address to highlighting how far the economy has come since the pandemic recession, with jobs plentiful and wages rising. But he will also focus on his plans to help slow rapid inflation, highlighting the challenge Democrats face ahead of the midterm elections: Inflation is painfully high, voters are angry and the proven way to lowering prices is to slow growth and the labor market.
Mr Biden will outline a four-part plan to fend off rapid price increases, including encouraging business competition and strengthening a supply chain that is struggling to keep up with consumer demand. Specifically, it will detail an effort to reduce shipping costs, which have skyrocketed during the pandemic.
But White House policies have historically served as a back-up line of defense when it comes to containing inflation, which is primarily the job of the Federal Reserve. The central bank is poised to move quickly in the coming months to raise interest rates, making money more expensive to borrow and spend. Higher rates are expected to slow hiring, wage growth and demand enough to dampen price increases.
It is possible that inflation will cool so much on its own this year that the Fed will be able to gently slow the economy down to a sustainable path. But if price gains remain rapid, the Fed’s playbook for fighting overheating is to inflict economic hardship.
That’s why inflation — unfolding at the fastest pace in 40 years — is a major handicap for the Biden administration. It undermines consumer confidence by cutting paychecks and causing sticker shock for consumers trying to buy groceries, sofas or used cars. And the cure could slow a strong economic rebound just as Democrats try to pitch their re-election pitch to voters.
“The biggest problem for President Biden is that there’s no good way to get a message out about inflation,” said Harvard economist and former White House economics chief Jason Furman. Obama administration. “He can’t do much about it, but he can’t stand up and say, the only solution here is patience and the Federal Reserve.”
My. Furman said that even if the solutions the president was to present were “the right things” for the administration to do, the nation should not be “under the illusion that it’s going to add a lot” in terms of rapidly cooling gain. price.
Mr. Biden is expected to use his remarks on Tuesday to try to refocus voters on the economic gains of his presidency.
The economy has added 6.6 million jobs since Mr Biden took office, unemployment is on course to fall below 4% and growth has been faster than in many other advanced economies. The strength and breadth of the rebound has surprised economists and policymakers, who often credit relief packages put in place under the Trump and Biden administrations for fomenting such a rapid recovery.
But some economists have warned that the $1.9 trillion legislation the administration introduced to Congress in March 2021 was too big and too poorly targeted, and would fuel demand and help fuel rapid price gains. . Although fiscal policy was not the only reason inflation erupted last year, it appears to have contributed to higher prices by encouraging greater consumption.
As consumers spent big in 2020 and last year, and home shoppers bought more goods like armchairs and computers than services like manicures and dining out, retail chains supply struggled to keep up.
Virus outbreaks continued to shut down factories, ports became congested, and there weren’t enough ships to go around. The perfect storm of big buys and limited supply has pushed up car prices in particular, left consumers waiting months for new dining sets and made luxury bikes harder to sell. find and afford.
And now, inflation has outpaced only pandemic-affected goods.
The cost of food, fuel, housing, vacations and furniture is rising rapidly – and with the conflict in Russia threatening to push petrol prices even higher in the coming months, the situation is likely to get worse. before improving.
While the White House has spent the past year downplaying soaring prices, arguing they will fade with the pandemic as global supply chains recover, nearly a full year of inflation readings high proved too difficult to ignore. Rising costs eat away at paychecks and help drive Mr. Biden’s ballot numbers at the lowest point of his presidency.
“I don’t think it’s going to go away in a way that’s going to save the incumbent party by November,” said Neil Dutta, an economist at Renaissance Macro Research. “Even though the labor market is strong enough, it’s not enough to keep pace with the shock people are feeling from inflation.”
The Fed is expected to raise interest rates from near zero at its meeting this month and officials have signaled they will then proceed with a series of hikes throughout the year as they try to contain inflation.
The central bank sets policy independently of the White House, and the Biden administration avoids talking about monetary policy out of respect for that tradition. But the timing could be politically tricky. The Fed could cause an economic pullback that coincides with this fall’s election season, creating a double whammy for Democrats in which central bank policy slows labor market progress even as inflation has failed. still completely gone.
That could be especially true if the conflict in Ukraine pushes up fuel prices, further fueling inflation and causing consumers to 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. “This could affect the unemployment rate by the end of the year.”
Mr. Furman said he thought it was more likely that Fed actions would not inflict too much pain this year, although they could start to squeeze the labor market in 2023. And Mr. Dutta said speculated that the Russian invasion of Ukraine could slow the central bank down somewhat, at least in the short term.
“The Fed basically has a choice – it can push the economy into a recession, or it can let inflation run a bit,” Dutta said. “They’re not going to risk a recession with the geopolitical situation we’re in.”
The conflict overseas may also give Mr. Biden and the Democrats a moment of patriotism to capitalize on. 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, rising gasoline prices at the pump resulting from the conflict could further undermine consumer confidence. Feeling fainted as price increases have climbed, and tends to be very sensitive to fuel costs. The price of a barrel of gas climbed above 100 dollars on Tuesday, the highest since 2014based on a popular reference.
The question is whether, in the face of rising costs, the administration will be able to turn the bright spots — international cooperation and the pace of recent job gains — into something salient for consumers and voters. .
The answer may depend on what happens next.
Annual price gains are expected to slow in the coming months as they are measured against the relatively strong numbers of last year and as supply chain delays ease somewhat. They could moderate further later this year if the current high prices of goods come back down, in the most promising scenario.
If inflation slows on its own and a relatively weak Fed response is enough to bring it down further, the economy could end up with strong growth, a booming job market and a positive outlook ahead of time. the approach of 2023.
But increasingly, inflation is expected to fade more slowly.
Goldman Sachs economists believe consumer price inflation could end 2022 at 4.6%, more than double its pre-pandemic level. That would mark a slowdown — the metric now sits at 7.5% — but it would be much higher than what the Fed normally targets.
That would allow the administration to talk about a moderation in price gains, but it might not seem like a significant improvement for consumers as they head to the polls.
“Inflation is always political, because it burns, even in a good economy,” Ms Swonk said. “It creates a feeling of chasing a moving target, which nobody likes.”