Happy Thursday! Baseball is back, as owners and players reached a deal. Here’s what else is happening following yesterday’s congressional drama around the $1.5 trillion omnibus spending package.
Inflation Soars to 7.9% Annual Rate, Highest in 40 Years
Rising prices for everything from fuel and food to services and housing sent the 12-month consumer inflation rate soaring to 7.9% in February, the Labor Department announced Thursday.
For the month, consumer prices rose by a hefty 0.8%. On an annual basis, the inflation rate surpassed the extraordinary 7.5% recorded in January. “The 12-month increase has been steadily rising and is now the largest since the period ending January 1982,” the report says.
Wages were unable to keep pace with spiraling prices. Inflation-adjusted average hourly earnings dropped by 2.6% in February, according to a separate report released Thursday.
Pain at the pump: The price of gasoline is playing a major role in the inflationary surge. Over the last 12 months, gas prices have risen 38%, increasing 6.6% just in February. And that number doesn’t include most of the huge price increases recorded since the Russian invasion of Ukraine.
More trouble ahead: Some analysts think that prices will continue to rise, driven in large part by soaring energy costs, and expect to see inflation levels of 8% or higher in the coming months. “The price shock that is now cascading throughout the domestic and global economies will be captured in the coming months and in our estimation will push top-line year-over-year inflation to 10% or more,” economist Joe Brusuelas of the consulting firm RSM said in a note.
Michael Gapen, chief economist at Barclays, told Bloomberg that it could take many weeks to reach a peak. “Inflation is not likely to roll over and begin to come down for several more months,” he said. “This sets the stage for where we are now. And we need to see how long this conflict plays out and how disruptive the sanctions regime actually is,” he added, referring to the invasion of Ukraine and the economic sanctions imposed on Russia.
Headaches for the Fed: The Federal Reserve is expected to go ahead with a quarter-point interest rate hike next week at its monetary policy meeting, but surging inflation creates a dilemma for the central bank. On the one hand, rate hikes seem even more necessary as part of the effort to get inflation under control. But soaring energy prices could spark a recession, which officials might hesitate to contribute to by continuing to raise rates.
“The Fed’s in a tough spot,” Wells Fargo director of rates strategy Michael Schumacher told CNBC. “It’s getting tougher by the day. It’s hard any time, but especially when you’ve got incredible inflation, and we’ve had the supply chain issues for a while, and now they’ve been exacerbated by Russia-Ukraine.”
Many economists have been estimating that the Fed will raise rates seven times this year, bringing the federal funds rate close to 2%. But continued high inflation could mean fewer rate hikes. “I think if oil went to $150 and you saw some break in the data somewhere, they might skip May for a hike,” Barclays chief U.S. economist Michael Gapen said.
Much will depend on the data and what Fed officials see as the biggest threat. Diane Swonk, chief economist at Grant Thornton, said that fears of inflation may weigh more heavily than worries about a recession. “We came into this with a lot of momentum. Oil price spikes don’t always cause recessions,” she told CNBC. “The Fed has to hedge against what else it’s worried about. That is inflation expectations have been moving up. The Fed has to think about what are the chances of this inflation more entrenched like the 1970s. They are trying to avoid that at all costs.”
Congress Looks to Finish $1.5 Trillion Spending Bill With Ukraine Aid
The House on Wednesday night passed a $1.5 trillion annual spending package that would keep the government funded through September and provide nearly $14 billion in aid for Ukraine and refugees fleeing the Russian invasion there.
To secure the necessary votes, though, House leaders were forced to strip $15.6 billion in pandemic funding from the bill after some Democrats objected to a deal that would have redirected that money from existing programs, including $7 billion promised to state governments as part of last year’s $1.9 trillion Covid relief law. The last-minute change leaves in doubt President Joe Biden’s Covid-response plans.
The House also passed a four-day stopgap extension of federal funding, a fallback measure meant to ensure that government operations can continue beyond the end of day Friday, when current funding is set to expire, while the Senate works to clear the larger omnibus spending bill.
Senate leaders reportedly want to pass the legislation before the week’s end, but the process faces delays as the result of a number of demands from GOP senators. “Members of GOP leadership say they are still hopeful that the Senate could pass the $1.5 trillion government funding deal, which also includes the Ukraine assistance, later Thursday,” The Hill’s Jordain Carney reports. “But first they need to cut deals with GOP senators who are warning that they could slow down the massive legislation.”
Here are a few other takeaways about the spending bill:
The pandemic is no longer the top priority — and replenishing funding won’t be easy: The White House said it requested $22.5 billion in additional pandemic funding “to avoid severe disruptions to our Covid response.” But Republicans were skeptical about the need for new money, and the conflict over the funding and offsets “underscored the deep and persistent political divides over the pandemic, and the federal government’s role in responding to it,” writes Emily Cochrane at The New York Times. She adds that “it also demonstrated that as infections and deaths subside, Covid-19 is no longer the dominant priority in Washington.”
Democrats still plan to hold a separate vote on the $15.6 billion in pandemic funding — without the repurposing of state and local money. “That means the legislation isn’t fully paid for, and there are no plans as of now to find an offset to replace the $7 billion in state and local aid,” The Washington Post’s Rachel Roubein reports, citing a senior Democratic aide. “That’s a problem in the Senate, where at least 10 Republicans would have to support the measure.”
More Ukraine aid ahead: The spending package includes $13.6 billion in humanitarian and military aid in response to Russia’s invasion of Ukraine, with more money likely to be needed before long. Top lawmakers “view this bit of funding as the first of many tranches of emergency money to come,” The Washington Post’s Paul Kane notes:
“The question is a matter of when, not if, Congress has to go back to the well to provide more funding and, largely depending on Zelensky and his government’s fate, whether this exercise becomes a semiregular round of war funding similar to how the wars in Iraq and Afghanistan were funded — or, possibly, whether it becomes more of a secretly financed effort akin to how Congress propped up the mujahideen resistance against the Soviet Union’s invasion of Afghanistan during the 1980s.”
Earmarks “are back with a vengeance”: After being banned for more than a decade, earmarks are back — and the spending package is loaded with more than 4,000 of them, The Hill’s Alexander Bolton reports, noting that the total “is still fewer than the 9,000 earmarks included in the fiscal 2010 appropriations bills that passed before House Republicans adopted an earmark ban after taking over the lower chamber in the 2010 midterm election.” Check out his story for more details. Roll Call’s Lindsey McPherson adds that the omnibus bill includes more than $4.2 billion in earmarks for House lawmakers, with nearly 60% of that going to projects in Democrats’ districts.
Column of the Day: The US Really Needs to Raise the Gas Tax
While some members of Congress have proposed to suspend the federal gas tax — and a growing number of governors and state lawmakers are calling for a gas tax holiday, too — Washington Post columnist Charles Lane this week argued that fixing U.S. energy policy should include a “substantial increase in the federal gas tax” — not right now, but once we’re past this crisis:
- ‘No Off-Ramps’: U.S. and European Officials Don’t See a Clear Endgame in Ukraine – Washington Post
- Senators Clash as Congress Labors to Finish $1.5T Spending Bill – Politico
- GOP Demands Delay Vote on Spending, Ukraine Aid – The Hill
- White House Warns of 'Severe' Hit to COVID-19 Response After Funding Dropped – The Hill
- Justice Department Reports More Than $8 billion in Alleged Fraud Tied to Federal Coronavirus Aid Programs – Washington Post
- IRS Budget Boosted as Agency Struggles Against Tax Return Backlog – The Hill
- U.S. Budget Gap Shrinks by More Than Half So Far in Fiscal Year – Bloomberg
- Biden Blames Putin for Inflation. GOP Blames Biden. – Politico
- Calls to Suspend Gas Taxes Across U.S. Grow as Prices Surge – Associated Press
- ‘People Are Going to Get Real Nervous’: Oil Shock Upends Fed Strategy – Politico
- What You Need to Know About the Cost of Police Misconduct – Washington Post
- Covid Long-Haulers Face Grueling Fights for Disability Benefits – Washington Post
- U.S. Mask Mandate on Airplanes and Public Transit Extended as C.D.C. Reviews It – New York Times
- 2020 Census Missed 18.8 Million People, Bureau Estimates – Washington Post
Views and Analysis
- Once Again, Congress Comes Together on the Main Thing It Can Agree On — Sticking It to Future Generations – Henry Olsen, Washington Post
- Congress Rushes to Send Aid to Ukraine, With Much More Likely to Come – Paul Kane, Washington Post
- Congress Has Wandered From Its Pathway to Deliver More Pandemic Funds – Rachel Roubein, Washington Post
- Lawmakers Want to Suspend the Federal Gas Tax. Is That a Good Idea? – Janet Nguyen, Marketplace
- Elevated Inflation Settles In for the Long Run – Jonathan Levin, Bloomberg
- The Fed Needs to Delay Its Rate Hikes – Karl W. Smith, Bloomberg
- How to Solve the Worker Shortage? Improve Pay and Other Conditions – Helaine Olen, Washington Post
- Here’s One Good Way to Lower the Cost of Insulin – Lisa Jarvis, Bloomberg
- What Comes After Omicron? No One Knows – Faye Flam, Bloomberg
- Workers Quitting Rotten Jobs Is a Good Thing – Jennifer Rubin, Washington Post