The Inflation Miscalculation Complicating Biden’s Agenda

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WASHINGTON – President Biden’s senior economists have been concerned from the start of his tenure that rising inflation could hinder the economy from recovering from the recession along with his presidency. Last spring, Mr Biden’s advisors made a forecasting error that helped translate their fears into reality.

Government officials overestimated how quickly Americans would start spending money in restaurants and theme parks, and underestimated how many people wanted to order new cars and couches.

Mr Biden’s advisors, along with economists and some scientists, believed that the widespread availability of coronavirus vaccinations would accelerate the return to prepandemic life, where people dine out and fill hotel rooms for conferences, weddings and other personal events.

Instead, the emergence of the delta variant of the virus in the summer and fall slowed the return to normal. Americans stayed home buying goods online, straining global supply chains, and driving up prices for almost everything in the economy.

“The strength of our economic recovery has allowed American families to buy more products,” Biden said in the port of Baltimore this month. “And – but you know what? You don’t go to dinner and lunch and local bars because of Covid. So what are you doing? You stay at home, order online and buy products. “

That view comes closest to a government explanation of why the White House was surprised by the size and duration of a price spike that has hurt Mr Biden’s polling figures and jeopardized part of his economic agenda in Congress. From a government perspective, the problem is not that there is too much money floating around, as Republicans and some economists claim, but that consumers are throwing an unexpectedly large amount of money into a limited number of things to buy.

Put another way, if Mr Biden had sent people travel vouchers or DoorDash gift cards for services – instead of making direct payments to Americans in March as part of his $ 1.9 trillion bailout – the inflation picture might look different right now.

What you should know about US inflation

Inflation rose in all wealthy countries over the past year, but it rose faster in the United States, where prices rose 6.2 percent year over year in October. America’s inflation was exacerbated in part by the fact that Mr Biden and his predecessor Donald J. Trump poured more fiscal support into the US economy than their counterparts elsewhere at a time when consumption patterns were changing and not quickly returning to normal.

Republicans and even some left-wing economists like former Obama administration officials Lawrence H. Summers and Jason Furman have attributed the soaring price hikes across the economy to the bailout package that Biden signed earlier this year. They say the package’s direct aid to Americans, including $ 1,400 checks for individuals and improved benefits for the unemployed, has fueled more consumer demand than the economy can handle and has driven prices higher.

Mr Biden is betting that these criticisms are largely false – and that the Fed would be wrong to take its advice. His staff say excessive consumer demand is not behind the fastest price hikes America has seen in decades, and that the economy needs more fuel, not less, to produce the work, wages and employment gains for historically marginalized workers. complete.

The president wants Fed chairman Jerome H. Powell, whom he reappointed for a second term this week, to join him on that bet – avoiding quick rate hikes that could slow growth and that wouldn’t address what White House officials see the root cause of inflation as the virus.

“We are still facing the difficult challenges and complications caused by Covid-19 that are driving up costs for American families,” Biden said in the White House on Monday as he announced the reappointment of Mr. Powell and the blame for inflation put at the feet of the resurgent virus.

While prices have by and large increased in all industries and sectors of the economy, there is a huge gap between the rates of inflation of the physical things people buy and the services they consume. The consumer price index for services rose by 3.6 percent compared to the previous year. In the case of durable goods, the figure is 13.2 percent more. And these goods account for a much larger proportion of American consumer spending than they did before the Covid-19 outbreak.

On the eve of the pandemic, about 31 percent of American consumer spending was in goods and the rest in services. In September that proportion had risen to around 35 percent, just below its pandemic highs. Those few percentage points made a big difference to supply chains, which were suddenly moving record-breaking amounts of toys, electronics and other goods from country to country and being strained under the load.

The $ 1.9 trillion bailout “squeezed the demand, and, importantly for the inflation story, much of that demand came in lower personal service consumption and increased demand for manufactured goods,” Jared Bernstein, A member of the White House Economic Council adviser said in a speech this week.

“Together with the effects of the virus on transport logistics, this has contributed to increased price growth.”

Understand the supply chain crisis

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Almost everything that is manufactured is in short supply. This includes everything from toilet paper to new cars. The disruptions go back to the beginning of the pandemic, when factories in Asia and Europe had to close and shipping companies cut their schedules.

Now the ports are struggling to keep up. In North America and Europe, where containers arrive, the strong influx of ships overwhelms the ports. Containers pile up when the warehouse is full. The chaos in global shipping is likely to continue due to the massive traffic jams.

Mr Powell made a similar diagnosis at the White House on Monday. “The economy is growing at the fastest pace in many years and promises a return to maximum employment,” he said. “Challenges and opportunities remain as always. The unprecedented reopening of the economy, coupled with the ongoing impact of the pandemic, resulted in supply and demand imbalances, shortages and a surge in inflation.

Mr Bernstein, his White House colleagues, and many liberal economists say price hikes should ease over the next year. The current struggle, while painful for consumers, is better than an alternate scenario where no bailout has been passed and the economy is recovering more slowly this year, they say.

“Avoiding a deep recession is a huge benefit that needs to be weighed against the inflation we are experiencing now. It is deeply denied, ”said JW Mason, an economist at the John Jay College of Criminal Justice at the City University of New York and a fellow at the liberal Roosevelt Institute. He added, “I don’t think there is a world where there is much less inflation, where there is not much more economic hardship either.”

These tensions have led White House officials to largely calm soaring prices in an attempt to alleviate supply problems. In the spring, they formed a supply chain task force to meet sustained high demand for products such as semiconductors (which paralyzed automobile production and drove car prices high), lumber (which increased the cost of building houses), and food can.

The government stepped up those efforts last month by announcing new measures and spending to clean up port residues and accelerate the clogged global flow of goods that has contributed to spike in inflation across much of the affluent world. On Tuesday, Mr Biden announced he would release 50 million barrels of oil from the country’s strategic reserve, in a concerted move with five other nations, to bring down gasoline prices, which have risen in recent months than drivers have in recent months return the streets.

But officials have found there are few major levers they can pull quickly to lessen the shipping delays that have driven up goods prices. Administrative economists say they are considering all options for more action and are driving forward some of the recent advances in port debris removal. The lack of specific details – or even common ideas from business groups or elsewhere – about what other policies supply chains could quickly clarify is telling. Mr Biden’s recent meeting on the matter with Heads of State or Government of 14 countries at the Summit of the Group of 20 in Rome did not result in any breakthrough agreements on what to do.

In the meantime, Mr Biden’s team hopes the Fed will keep its patience with the recovery and not withdraw too quickly in its efforts to further stimulate economic growth. One of the reasons Mr Biden elected Mr Powell for another term, rather than raising Lael Brainard, the Fed governor he elected as vice chairman, was the belief that Mr Powell – a Republican appointee – was a unique one bipartisan credibility for his actions at a time when Republicans are pounding Mr Biden over soaring prices.

“In times like these, we need stable, tried and principled leadership from the Fed,” Biden said on Monday. He added, without further explanation, but with clear intent: “And we need people of character and integrity who can be trusted to focus on the right long-term goals for our country – for our country.”