At a community college in central Virginia on Thursday, Joe Biden put his finger on the biggest domestic problem of his presidency. “Inflation is up. It’s up,” the US president said. “And coming from a family when if the price of gas went up, you felt it . . . it matters.”
Biden was speaking just a few hours after data showed the US consumer price index rose by 7.5 per cent last month compared to January 2021, exceeding economists’ expectations and marking the largest annual jump since 1982.
High inflation has blemished what would otherwise be a strong economic record for Biden, with elevated job and wage growth. It has depressed his approval ratings and contributed to the demise of a $1.75tn flagship spending bill that some lawmakers feared would exacerbate higher prices.
Like many forecasters, the Biden administration’s economic team had been expecting inflation to gradually subside after its initial surge in the spring of 2021, but that view has been debunked by persistently high readings.
The White House has since scrambled to tame inflation: Biden dispatched top officials to ease bottlenecks at US ports, pushed Saudi Arabia and other Opec members to increase oil production, and told regulators to crack down on price gouging.
But those efforts have done little to change the dynamic, leaving the administration relying on the Federal Reserve to stamp out inflation with a string of interest rate rises ahead of this year’s midterm elections, when many pundits expect Biden’s Democratic party to take a shellacking.
“Inflation is not intractable, the Federal Reserve can always do something about it,” said Don Kohn, a former senior Fed official now at the Brookings Institution. “I guess the harder question is, ‘what does the Fed need to do, and can it engineer a soft landing?’”
White House officials believe there is still a strong case to be made for inflationary pressures subsiding over the course of the year as the disruptions of the pandemic recede and the economy returns to a more normal footing.
Although price increases have broadened out in recent months, in some areas, such as new and used cars, they have shown signs of moderation, suggesting a peak could be on the horizon.
“We continue to think as we look over the course of the year that we will get to a place where inflation is substantially easing, and inflation is substantially lower by the end of the year than it is now,” said a White House official.
But plenty of damage has already been done to Biden’s political standing. As recently as August, 51 per cent of Americans approved of his handling of the economy, but that figure has fallen to just 37 per cent, according to a CNN poll released on Thursday that contained grim figures for the White House.
The persistence of inflation has obscured the benefits of a roaring job market, which performed much better than expected even in recent months as the Omicron variant of the coronavirus surged across the country. Higher prices have also undercut wage gains.
Perhaps most dispiritingly for the White House, it was soaring inflation that emboldened Joe Manchin and Kyrsten Sinema, Democratic senators from West Virginia and Arizona respectively, to scupper Biden’s hopes of spending $1.75tn on bolstering the social safety net.
The Build Back Better package, which also contained climate measures and was funded by higher taxes on the wealthy and corporations, was the centrepiece of the president’s vision for the economy.
“Inflation [is] causing real and severe economic pain that can no longer be ignored,” Manchin said on Thursday, in his latest shot across the bow of the White House. “It’s beyond time for the Federal Reserve to tackle this issue head on, and Congress and the administration must proceed with caution before adding more fuel to an economy already on fire.”
Michael Strain, director of economic policy studies at the American Enterprise Institute, said the Biden administration shoulders much of the blame for surging prices, arguing the $1.9tn stimulus it enacted in March last year was excessive.
“It contributed to both a big boom on the demand side of the economy and also supply side restrictions. And so I think that set the stage for the United States to have a worse inflationary problem than Europe and also a worse inflationary problem than we would have had if the [stimulus] were say, $500bn.”
Some economists including Strain have also pointed out that Biden could have done more to ease inflation by cancelling tariffs on Chinese goods introduced by his predecessor Donald Trump, a move the Biden administration has resisted so far.
But White House officials and many Democrats fiercely defend their economic approach and the stimulus measures. They argued it achieved their primary goal of fostering a much stronger rebound compared with the recovery from the 2008 financial crisis, while sharply reducing poverty and handing a financial lifeline to struggling families.
Indeed, left-leaning economists now worry that lawmakers and central bankers may become too hawkish on inflation, both in monetary and fiscal policy, jeapordising the administration’s accomplishments thus far.
“I’m more concerned that people overreact to the numbers, that they force the Federal Reserve to raise interest rates too aggressively and kill the recovery that needs to live much longer,” said Christian Weller, a senior fellow at the Center for American Progress and a professor at the University of Massachusetts at Boston.
He added: “I’m also concerned that people will use it to block legislation necessary to increase economic capacity.”
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