Biden will have to be patient with inflation

Customers line up to pay at a grocery store in San Francisco, California, United States, Thursday, November 11, 2021.

David Paul Morris | Bloomberg | Getty Images

After years of sleeping, inflation is eating away at US wallets again, 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 his economic agenda forward as a remedy for inflation concerns.

But ask investors, economists, and the American people what they think about inflation, and no one will see inflation subside anytime soon. This means that everyone from the president to the regular voter will likely need patience to get over this.

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

“I think the hardest thing to communicate is that not all problems have a solution. Part of what needs to be done to heal our economy is to be patient,” he continued. “It’s a really tough message for a president to get across. They have to be seen to be doing things.”

The pricing policy

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

In turn, the inflation messages emanating from the White House have focused heavily on two big Biden-backed bills. One of the president’s favorite ways to fight inflation concerns is to point out that many economists claim his $ 1.75 trillion Build Back Better bill and a separate $ 1 trillion infrastructure plan. dollars will make businesses and workers more productive and ease inflationary pressures in the long run.

Yet while better roads, access to child care, and weatherization may help cut costs in the years to come, Democrats face critical midterm elections in less than 12 months. month.

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

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Political strategists viewed this election as a measure of voters’ attitude towards the current direction of politics with Democrats controlling the White House and Congress. The high-profile Democratic defeat in increasingly blue Virginia is believed to have sparked a compromise between the party’s centrists and progressives on infrastructure and poverty and climate bills.

Americans’ anxiety about the economy, measured by the percentage of respondents who cite an economic problem as the main problem facing the United States, has peaked in the era of the pandemic, according to the cabinet Gallup poll. (The survey interviewed 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 concern as the country’s biggest problem, while 7% say inflation, in particular, is their biggest worry. In September, just 1% of Americans cited inflation as their top concern, Gallup said. It has been more than 20 years since inflation was named the most important problem by at least 7% of Americans.

“Moms and dads are worried and ask, ‘Will there be enough food we can afford to buy for the holidays? Will we be able to deliver Christmas gifts to children on time? “” Biden said in a speech Tuesday.

No major impact on gas

To help keep fuel costs down during the holiday season, Biden announced that the United States and some of its allies will exploit their national strategic oil reserves.

“The point is, we’ve already faced even worse peaks over the past decade,” Biden said of rising gas prices. “But that doesn’t mean we have to sit idly by and wait for prices to come down on their own.”

While the Biden administration has said it will put 50 million barrels of oil from government stocks on world markets in the coming weeks, some analysts have warned that the action is likely to amount to an attempt to pacify them at best. consumers.

The exploitation of the country’s oil reserves will have a limited impact on fuel costs since “nearly 40% of the release of 50 MM barrels was already scheduled for 2022, as well as the fact that a large part of the oil will go simply in trading stocks, ”wrote Tom Essaye, founder of Sevens Report, a market research company.

This oil will eventually be bought back “and later returned to the SPR, which means the move is largely symbolic and will not have a major impact on actual physical markets,” he added.

Furman, who teaches economics at Harvard University, agreed. He said relying on the SPR fell under the “no stone’s throw” category for a White House worried about the political impact of rising prices.

Current inflation, he said, is a function of big changes in aggregate demand and aggregate supply – beyond the influence of a one-time call to the SPR or any other quick fix.

Inflation expectations

A pesky feature of inflation is that price increases today are the product of what people think prices will be tomorrow. In other words, inflation expectations alone can cause inflation.

According to the most recent New York Federal Reserve consumer survey, median inflation expectations in October rose to 5.7% for the coming year, the highest level on record since the start of the series in 2013.

A measure of investor expectations for inflation over the next five years has risen in recent months.

The difference between the yields on inflation-protected five-year Treasuries, or TIPS, and the corresponding Treasuries hit 3.17 on Wednesday, its highest level since at least 2003. This effectively means investors are thinking that inflation will average around 3% 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. The minutes of their meeting, released on Wednesday, showed some central bankers saw the jump as evidence that rising inflation expectations are starting to generalize.

“A few participants indicated that increases in survey-based and market-based expected inflation indicators, including the notable increase in the five-year TIPS-based inflation compensation measure, were signs possible that inflation expectations were becoming less and less anchored. The Fed minutes were read.

“I taught my students the model that would have helped them predict inflation this year. And that model is that if the demand is very short, additional demand can help,” he said.

“But if you try to push too far, you run into a supply constraint,” he continued. “You will end up with higher prices rather than higher quantities.”

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