Biden, the economy jeopardized by the peak of inflation expected in May
Another spike in monthly price growth poses a serious threat to the US economy – and President Biden’s political outlook.
New consumer price index (CPI) inflation data to be released on Friday is expected to show consumer prices rising at a faster rate between April and May, largely due to the surge oil prices and their ripple effects on the economy as a whole. Shocks to the global food supply caused by the war in Ukraine and a sharp increase in summer travel and energy consumption are other factors likely to push inflation even higher.
After months of downplaying inflation, inaccurately predicting its decline and blaming price growth on a wide range of external forces, Biden and his top economic officials are rising to the challenge ahead.
Treasury Secretary Janet Yellen, one of the first Biden officials to admit she misinterpreted inflation, told lawmakers on Wednesday that price growth was at “unacceptable levels” and called for a reduction in inflation. inflation as the country’s top priority.
But Yellen admitted on Tuesday that it would be “virtually impossible” for the United States to protect itself from one of the main forces behind high inflation: soaring oil prices.
Yellen also broke with other administration officials and dozens of Democratic lawmakers by saying high inflation had nothing to do with corporate greed, a common refrain from lawmakers keen to deflect blame from the government. administrative inflation.
While the annual inflation rate is expected to hold even at 8.3%, according to economists’ consensus projections, this is still the fastest annual price increase since the early 1980s. inflation has peaked, Americans will still face rapidly rising prices for months or even years without a sudden and potentially damaging shift in the economy.
“There’s always this debate: ‘Are we on top? Have we passed the peak? Is it 8.5 [percent]? Is it going to be 8.6? ” said Gregory Daco, chief economist at EY-Parthenon, in an interview on Wednesday.
“The average household, the average business doesn’t care if the peak was 8.6 or 8.5 or whatever. What interests them is what inflation will be in six months, in a year.
There is little time left for inflation to come down significantly before the midterm elections in November, when Democrats are expected to lose their House and Senate majorities amid widespread voter discontent with the government. the economy.
As inflation has risen, Biden’s approval ratings have plummeted despite adding more than 10 million jobs since taking office in January 2021, flat consumer spending and rapid wage growth.
Daco said there were encouraging signs of easing some price pressures, particularly for consumer electronics, appliances, furniture and other goods that were in short supply and in high demand during much of the past two years.
After scrambling to build up inventory, retailers such as Walmart and Target have started offering discounts on products that are now too expensive and overbought to sell at inflated prices.
Even so, he said prices for food, oil, travel, housing and medical services — categories where many Americans may struggle to cut spending — show no signs of slowing.
“You only notice car price inflation if you buy a car, right? You will only notice the increase in furniture if you buy a new couch or buy a new washing machine dishes,” Daco said.
This momentum does not hold when the prices of basic commodities like groceries and gas continue to rise.
Daco added that higher oil prices affect the economy by increasing transportation and manufacturing costs – two energy-intensive forces that drive up prices for suppliers and the consumers they are scrambling to serve. .
“Everyone uses some form of refined petroleum, whether it’s gasoline or diesel, or any other type of fuel. As a result, the prices of most services actually incorporate some form of energy costs,” he said.
“Rising fuel prices tend to have this insidious effect on many consumer goods, services and prices, and as a result, it’s much more noticeable.”
Higher inflation could also force the Federal Reserve to take much more drastic measures to slow the rate of price growth. The Fed is already implementing a series of interest rate hikes intended to slow the economy toward lower inflation, but economists fear the bank may have to raise rates high enough to cause a recession if inflation does not begin to fade quickly.
The Fed is also about to start allowing trillions of dollars of bonds, which it bought to stimulate the economy, to expire from its balance sheet, which has the practical effect of taking money out of the markets. loans.
“The economy and the financial system have become accustomed to large Fed balance sheets and extremely low rates. Many investments and business decisions are made on the assumption that interest rates are going to be low for a long time. As a result, it is extremely difficult to tighten monetary policy without affecting financial markets and the real economy,” said Kairong Xiao, an associate professor of finance at Columbia University, in an email Wednesday.