Inflation Hits a 30-Year High. Will It Sink Biden’s Agenda?

Inflation Hits a 30-Year High. Will It Sink Biden’s Agenda?

U.S. President Joe Biden visits the Port of Baltimore
By Yuval Rosenberg and Michael Rainey
Wednesday, November 10, 2021

Inflation Hits a 30-Year High. Will It Sink Biden’s Agenda?

U.S. prices rose 6.2% over the last year, the largest annual increase since 1990, the Bureau of Labor Statistics announced Wednesday.

Prices rose 0.9% in October compared to September, with the cost of energy, shelter, food and cars both new and used rising significantly during the month. On a 12-month basis, the cost of fuel oil is up about 60%, utilities are up 28% and the price of bacon is up 20%.

In a separate report, the Labor Department said that while wages rose on a nominal basis in October, the increase in inflation was enough to produce an overall decrease of 0.5% in wages when factoring in inflation.

The latest data are feeding worries that inflation will continue to be higher and more persistent during the recovery from the Covid-19 pandemic than some economists had predicted. Both the White House and the Federal Reserve have portrayed recent price hikes as largely “transitory,” driven by comparisons with numbers from last year’s pandemic and supply chain problems that will eventually resolve themselves, but Wednesday’s report is raising new doubts about those claims.

A threat to Biden’s agenda — and presidency: Politically, the inflation numbers could make it more difficult for President Joe Biden to push through his $1.8 trillion Build Back Better bill, the next major plank of his economic agenda.

Sen. Joe Manchin (D-WV), an essential vote in an evenly divided Senate, has repeatedly criticized the size of the bill — now reduced to about half its original size largely in response to his concerns — and on Wednesday the West Virginia Democrat indicated that the latest numbers may make him dig in on his position.

“By all accounts, the threat posed by record inflation to the American people is not ‘transitory’ and is instead getting worse,” Manchin tweeted. “From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day.”

Biden responded to those concerns in a statement Wednesday, arguing that the recently passed infrastructure bill will help ease supply bottlenecks, while the larger social spending package still under debate would fight inflation by reducing the cost of child care, prescription drugs and health coverage.

Still, Biden sent a signal that he recognizes that rising prices are a problem. “Inflation hurts Americans pocketbooks, and reversing this trend is a top priority for me,” he said in a speech at the port of Baltimore. He said he has ordered White House officials to address the issue: “I have directed my National Economic Council to pursue means to try to further reduce these costs, and have asked the Federal Trade Commission to strike back at any market manipulation or price gouging in [the energy] sector.”

The debate over Biden’s spending plan: At the same time, many economists have pushed back against the idea that spending provided by the Build Back Better plan would be inflationary in the first place. Assuming its cost is fully or largely offset, the legislation would produce only limited inflationary effects, and perhaps none at all, depending on how it’s implemented. On top of that, the spending is spread out over 10 years, with its annual effect being only a fraction of the overall cost.

“The reconciliation bill would have essentially no discernible effect on the medium- or long-term path of inflation,” former White House economic adviser Jason Furman tweeted Wednesday. “That legislation should be evaluated on other criteria like what it does for opportunity, climate change & long-term growth.”

More pressure on the Fed? In his statement Wednesday, Biden cited the Fed’s role in fighting inflation. “I want to reemphasize my commitment to the independence of the Federal Reserve to monitor inflation, and take steps necessary to combat it,” he said.

As part of an effort to withdraw its support for the economy, the central bank announced last week that it would start winding down its $120 billion per month bond-purchasing program in November, with the goal of ending it entirely by June. But it also signaled that it had no plans to raise interest rates in the near future, given the fact that millions of Americas are still out of work. Now, with the release of another month of worse-than-expected inflation data, it could face calls to act more quickly and decisively.

“It is hard to see how the Fed will be able to stay on the sidelines much longer,” Matthew Sherwood of the Economist Intelligence Unit told Fox Business. Katherine Judge of CIBC Economics said that the latest data “will leave more doubts in the Fed’s mind about how long they can let this inflation run.”

The Fed is in an increasingly difficult position, though, with its dual mandate of fighting inflation and promoting employment pulling in opposite directions. Persistent inflation could push the bank to raise interest rates sooner than it wants, but doing so could slow the recovery and the much-needed growth in payrolls.

What comes next: Many experts think inflation will continue to be a problem, at least in the near term. “This is going to get worse before it gets better,” Diane Swonk, chief economist at Grant Thornton, told The Washington Post.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, put some numbers on the gloomy outlook. “I hate to say this, but October's core CPI is just a taster,” he tweeted, referring to the core consumer price index, which rose 4.6% in October. “The next few months are going to be horrible. The y/y core rate is headed for 6-6.5% over the next three months, and it could even hit 7%.”

At the same time, Shepherdson said that he expects things to improve significantly in the medium term. “I still think as a base case that inflation will be *way* lower a year from now,” he said.

The Washington Post’s Heather Long was a bit more ambiguous. “No one really knows how this is going to end,” she tweeted. “The ‘consensus’ is inflation will be very high through the winter and spring. Then start to moderate. But if Fed, [White House] & Wall Street are wrong, it will get messy. And Fed will have to act (i.e. raise interest rates) in 2022.”

October Deficit Fell 42% to $165 Billion

The U.S. budget deficit fell to $165 billion in October, down 42% from a year ago when the government posted a $284 billion gap, a record for the month.

The Treasury Department reported Wednesday that federal spending last month fell 14% compared to the prior October, dropping from about $522 billion to $449 billion. Revenues, meanwhile, rose 19% to $284 billion.

“Treasury officials said Wednesday that the lower October deficit this year was attributable to more tax revenue from millions more people back working, and booming corporate profits as the economy reopened,” Matt Ott of the Associated Press reports. “Last October, there were still no vaccines and many businesses suffered as people remained holed up at home.”

The Treasury Department last month reported that the deficit for fiscal year 2021, which ended in September, totaled $2.77 trillion, down from $3.13 trillion the year before but still the second highest on record. The Congressional Budget Office projects that the deficit will fall to $1.15 trillion for this fiscal year, though that estimate does not include the $1.2 trillion infrastructure bill Congress just passed.

Premiums for Employer Health Plans Rose 4% on Average This Year: Report

Annual premiums for family coverage in employer-provided health insurance plans rose by 4% on average this year to more than $22,000, according to a survey released Wednesday by the Kaiser Family Foundation. Workers paid nearly $6,000 of that tab on average, with employers covering the rest. Premiums for individual plans averaged more than $7,700.

The premium increase roughly matches the annual increase in workers’ wages, 5%, and is about twice the rate of inflation for the year, 1.9%. Since 2011 premiums have risen 47%, far greater than wages (31%) or inflation (19%), the report says.

The average deductible for individual workers who have one was nearly $1,700 this year, up about $1,000 since 2021. More workers now have deductibles, too: 85%, up from 74% a decade ago. Across all insured workers, including those without deductibles, the average deductible has risen 92% over the past decade.

About 155 million Americans rely on employer-sponsored coverage.

Number of the Day: 900,000

The White House estimated Wednesday that 900,000 children aged 5 to 11 have gotten their first dose of Covid-19 vaccine since the Pfizer-BioNTech shots were given emergency use authorization for youngsters last week. Jeff Zients, the White House coronavirus response coordinator, told reporters that the estimate is a conservative one and that another 700,000 pediatric vaccination appointments have been scheduled at local pharmacies.


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