Republicans are invoking the threat of inflation to attack President Joe Biden’s spending plans, after he won approval for $1.9 trillion in virus relief ahead of a broader recovery package that may cost even more.
The strategy likely faces an uphill task to gain voter traction. Inflation has been subdued for decades, most economists expect it to stay that way, and there’s little sign of public concern -- even if gasoline prices have been rising.
The prospect of a bout of inflation, as the economy roars back from its pandemic slump with the help of trillions of dollars in government spending, has gripped financial markets this year and pushed Treasury yields up. Still, investors and consumers expect prices to remain under control. The annual inflation rate was 1.7% last month. Economists forecast it will creep up to 2.9% in early summer, before falling back later in the year.
Under Control?
Inflation is expected to rise in the coming months, then fall back
Source: Bureau of Labor Statistics, Bloomberg economist surveys
Congressional Republicans have seized on a warning from Harvard economist Larry Summers, a top economic official in both the Clinton and Obama administrations, that the consensus is too complacent. Summers has said the scale of Biden’s relief plan could set off inflationary pressures “of a kind we have not seen in a generation.”
‘Day of Reckoning’
Senator John Barrasso of Wyoming, a member of the Republican leadership team, quoted Summers and warned that “mortgage rates are going to go up, energy prices will go up, car payments will go up.”
Senator John Thune, the No. 2 Republican leader, said the pandemic relief package passed by the House on Wednesday would “unleash inflation” with dire consequences for families. Senator Rick Scott, who chairs the Senate GOP’s campaign arm, predicted that debt-fueled inflation will lead to a “day of reckoning.”
Economists who play down inflation fears point out that the U.S. economy is still millions of jobs short of pre-pandemic levels -- suggesting it’s far from hitting any speed limits. Some prices may edge up for a while, as vaccines trigger a rush to eat out or fly somewhere on vacation -– but those effects will prove temporary. Policy makers have been too quick to hit the brakes in past recoveries, and should keep their foot on the gas this time until the country is back at full employment.
Those arguments have been laid out by Federal Reserve Chair Jerome Powell -- who said this month that “there’s a difference between a one-time surge in prices and ongoing inflation” -– and Treasury Secretary Janet Yellen, his prececessor at the Fed. Yellen told MSNBC on Monday that inflation before the pandemic “was too low rather than too high.”
Falling Short
For most of the last decade, the Fed's problem was too-low inflation
Source: Bureau of Economic Analysis, forecasts compiled by Bloomberg
The fact that the current and former chiefs of the Fed, which is responsible for keeping inflation under control, aren’t worried about an outbreak now was cited by Democratic Senators including Tim Kaine of Virginia.
‘Bigger Risk’
“The bigger risk, with 10 million people still looking for work and half a million people dead, was going too small than going too large,” said Kaine. He pointed out that President Donald Trump’s administration also widened the U.S. budget deficit with tax cuts, and said the Biden plan will have “a much more positive effect on the economy.”
Costlier gasoline in the summer months, when Americans will likely be driving more as the economy reopens, may coincide with Biden’s push to get his “Build Back Better” recovery plan, including spending on infrastructure, through Congress.
Still, gas prices have been much higher than their current levels in much of the past decade.
Not Unusual
Gas prices are rising, but remain moderate by the past decade's standard
Source: American Automobile Association
What’s more, although voters are sensitive to gasoline hikes, they tend not to link that to broader inflation, according to Democratic pollster Celinda Lake, who advised Biden’s campaign and has done focus groups on infrastructure spending. She said voters likely won’t make the kind of connection between government investment and rising prices that would aid the GOP effort.
“The irony is that people think that infrastructure is less likely to lead to inflation, and the people who really believe that are Republican men,” Lake said.
‘People Have Learned’
Even if the spending plans push prices a bit higher, Democrats can point to strong public support for their policies. The latest Covid relief package was backed by 70% of Americans, including 41% of Republicans and Republican-leaning independents, according to a Pew Research Center poll last week.
Surveys suggest that Americans do expect to pay higher prices for a while. The University of Michigan Consumer Survey in February showed year-ahead inflation expectations rising to 3.3%, the highest since 2014.
It also found that that consumers anticipate 2.7% inflation on average over the next five years –- not too much higher than the rate implied by bond markets.
When inflation expectations really rise, consumers typically move forward purchases of big-ticket items like cars or household durables, according to Richard Curtin, director of the Michigan survey. In the pandemic, “that hasn’t happened,” he said.
“We’ve had low inflation for a good long time, but it is subject to these temporary surges,” said Curtin. “People have learned that those surges are short lasting.”
— With assistance by Steven T. Dennis, and Laura Litvan
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Republicans Try Out Inflation as a Stick to Beat Biden Stimulus - Bloomberg
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