President Biden is expected to devote much of his State of the Union address to highlighting how far the economy has come since the pandemic downturn, with jobs plentiful and wages rising. But he will also focus on his plans to slow rapid inflation, highlighting the challenge Democrats face ahead of the midterm elections: inflation is painfully high, voters are unhappy, and the tried and true way to bring down prices is to slow growth and hurt the labor market.
Mr. Biden will lay out a four-part plan to curb soaring prices, including encouraging corporate competition and strengthening a supply chain that is struggling to keep up with consumer demand. In particular, he will detail efforts to reduce shipping costs, which have skyrocketed during the pandemic.
But White House policy has historically served as a back-up line of defense when it comes to curbing inflation, which is the job of the Federal Reserve in the first place. The central bank is poised to quickly raise interest rates in the coming months, making it more expensive to borrow and spend money. Higher rates are meant to slow hiring, wage growth and enough demand to keep prices down.
It’s entirely possible that inflation could drop enough on its own this year that the Fed could gently slow the economy back on track. But if price increases remain fast, the Fed’s strategy to combat overheating is to cause economic damage.
That’s why inflation, which is at its fastest pace in 40 years, is a major concern for the Biden administration. It erodes consumer confidence by slashing wages and shocking consumers trying to buy groceries, sofas or used cars. And the cure could slow down a sustained economic recovery, just as Democrats are trying to claim reelection to voters.
“The biggest problem for President Biden is that there is no good way to report inflation,” said Jason Fuhrman, a Harvard economist and former White House economic official during the Obama administration. “He can’t do much about it, but he can’t stand up and say the only solution here is patience and the Federal Reserve.”
My. Furman said that while the decisions the president was supposed to lay out were “the right things” for the administration, the country should have “no illusions that it would do much good” in terms of rapid cooling. price gain.
Biden is expected to use his Tuesday speech to try to refocus voters on his presidency’s economic victories.
The economy has added 6.6 million jobs since Mr. Biden took office, unemployment should fall below 4 percent, and growth has been faster than in many other advanced economies. The strength and scope of the recovery has surprised economists and policymakers, who often credit aid packages rolled out under the Trump and Biden administrations to have contributed to such a quick recovery.
But some economists have warned that the $1.9 trillion bill the administration pushed through Congress in March 2021 was too big and too poorly targeted, and that it would spur demand and drive prices up quickly. While fiscal policy wasn’t the only reason for the surge in inflation last year, it appears to have helped drive up prices by boosting consumption.
As consumers spent more in 2020 and last year, and shoppers bought more goods like armchairs and computers rather than services like manicures and eating out from home, supply chains struggled to keep up. .
Virus outbreaks continued to close factories, ports clogged, and ships ran short. A perfect storm of strong buying and limited supply pushed car prices skyrocketing in particular, kept consumers waiting for months for new dining sets, and meant fancy bikes were harder to find and afford.
And now inflation has bypassed only those goods that were affected by the pandemic.
The cost of food, fuel, housing, vacations and furniture is rising rapidly, and with the conflict in Russia threatening to further increase gas prices in the coming months, things are likely to get worse before they get better.
Updated
March 1, 2022 3:45 pm ET
While the White House spent the past year downplaying rising prices, arguing that they will disappear with the pandemic as agitated global supply chains mend, nearly a full year of high inflation has proven too much to ignore. Climbing costs eat into salaries and help push Mr. Biden’s polling numbers to the lowest levels of his presidency.
“I don’t think it’s going to disappear in a way that saves the ruling party by November,” said Neil Dutta, an economist at Renaissance Macro Research. “While the labor market is strong enough, it is not enough to keep up with the shock that people are experiencing due to inflation.”
The Fed is expected to raise interest rates from near zero at its meeting this month, and officials have signaled they will then make a series of hikes throughout the year in an attempt to contain inflation.
The central bank sets policy independently of the White House, and the Biden administration avoids talking about monetary policy out of respect for that tradition. But times can be politically challenging. The Fed could trigger an economic downturn that will coincide with this fall’s election season, dealing a double whammy to Democrats as central bank policies slow down the labor market, even though inflation hasn’t completely stopped yet.
Some economists believe that this could be especially true if the conflict in Ukraine pushes up fuel prices, fuels inflation even further, and leaves consumers expecting prices to continue to skyrocket.
“The Fed needs to be more aggressive on inflation,” said Diane Swank, chief economist at Grant Thornton. “By the end of the year, this could lead to an increase in the unemployment rate.”
Mr Furman said he thinks it’s more likely that the Fed’s actions won’t cause too much pain this year, though they could start to squeeze the labor market in 2023. And Mr. Dutta suggested that a Russian invasion of Ukraine could slow the central bank down somewhat, at least in the short term.
“Essentially, the Fed has a choice – they can plunge the economy into recession or let inflation pick up a bit,” Mr. Datta said. “They’re not going to risk a recession in the geopolitical situation we’re in.”
A conflict abroad could also give Mr. Biden and the Democrats a moment of patriotism to take advantage of. So far, Mr. Biden’s sanctions have been well received by voters, according to an ABC/Washington Post poll.
At the same time, higher gasoline prices as a result of the conflict could further undermine consumer confidence. Sentiment has worsened as prices have risen and tends to be very sensitive to fuel costs. The price of a barrel of gas topped $100 on Tuesday, the highest since 2014, according to a popular benchmark.
The question is whether the administration, in the face of rising costs, can turn the highlights – international cooperation and the pace of recent job growth – into something meaningful for consumers and voters.
The answer may depend on what happens next.
Annual price increases are expected to slow in the coming months as they are measured against last year’s relatively strong performance and supply chain delays ease somewhat. Later this year, they could ease the situation even more if the current high commodity prices ease again, which is the most hopeful scenario.
If inflation slows on its own and the Fed’s relatively small reaction is enough to push it down further, the economy could be left with strong growth, a booming labor market and a positive outlook for 2023.
But increasingly, inflation is expected to decline more slowly.
Economists at Goldman Sachs believe that consumer price inflation could end in 2022 at 4.6%, more than double the level it fluctuated before the pandemic. That would mean a slowdown – the figure is currently 7.5 percent – but it would be much higher than the Fed usually aims for.
This would allow the administration to talk about a modest increase in prices, but this may not seem like a significant improvement to consumers when they head to the polls.
“Inflation is always political because it burns even in a good economy,” Ms Swank said. “It creates the feeling of chasing a moving target, which nobody likes.”