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Inflation miscalculations complicating Biden’s agenda

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Inflation miscalculations complicating Biden’s agenda

WASHINGTON – President Biden’s top economists have worried since the beginning of his administration that rising inflation could hinder his presidency as well as the economy recovering from the recession. Last spring, Mr Biden’s advisers made a forecasting error that helped turn their fears into reality, a calculation that extended to this week’s decision to re-nominate the Federal Reserve chair.

Administration officials underestimated how quickly Americans would start spending money at restaurants and theme parks, and they underestimated how many people would want to order new cars and sofas.

Mr Biden’s advisers, along with economists and some scientists, believed the widespread availability of coronavirus vaccinations would accelerate a return to pre-pandemic life, in which people flocked to hotels for conferences, weddings and other personal events. Rooms filled.

Instead, the emergence of the delta version of the virus slowed during the summer and fall that returned to normal. Americans stayed home, where they continued to buy goods online, straining global supply chains and skyrocketing the price of almost everything in the economy.

“Because of the strength of our economic recovery, American households are able to buy more products,” Biden said at the Port of Baltimore this month. “And – but guess what? They’re not going out for dinner and lunch and not going to the local bar because of covid. So what are they doing? They’re staying at home, they Ordering online, and they’re buying products.”

The approach is the closest thing the administration has offered to an explanation for why the White House was surprised by the size and permanence of a price hike that hurt Biden’s polling numbers and spoiled part of his economic agenda in Congress. From an administration’s perspective, the problem is not that Republicans and some economists insist that there is too much money moving around, but that consumers are throwing unexpectedly large amounts of things at a narrow set of points to buy. Huh.

Put another way: If Mr. Biden had sent people to travel vouchers or DoorDash gift card services — instead of sending payments directly to Americans as part of his $1.9 trillion rescue plan in March — the inflation picture could look different right now. Is.

Inflation has risen in wealthier countries over the past year, but it has risen sharply in the United States, where prices rose 6.2 percent in October from a year earlier. America’s inflation is in part driven by Mr. Biden and his predecessor, Donald J. Trump, has accelerated by injecting far more fiscal support into the US economy than its counterparts, at a time when consumption patterns have changed and have not rapidly returned to normal.

Republicans, and even some left-wing economists such as former Obama administration officials Lawrence H. Summers and Jason Furman, have attributed the rapid price rise in the economy to the aid package signed by Mr. Biden in the spring. They say the package’s direct aid to Americans, which includes $1,400 checks to individuals and increased benefits for the unemployed, spurred more consumer demand than the economy, causing prices to skyrocket.

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Mr Biden is betting that those criticisms are largely false – and that the Fed would be wrong to follow their advice. His colleagues say that higher consumer demand is not the driver of the fastest price rise the US has seen in decades, and that the economy has to work harder to meet the task of paying wages and employment benefits to historically marginalized workers. Requires fuel, no less.

The president wants Fed Chairman Jerome H. Powell, whom he re-appointed for a second term this week, to join that bet — to avoid a quick hike in interest rates that could stifle growth, and who will not address White House officials. As to the real cause of inflation: the virus.

“We are still dealing with the difficult challenges and complications caused by COVID-19, which are increasing costs for American families,” Biden said Monday at the White House while announcing Mr. Powell’s reappointment. In the stages of the resurgence virus.

While prices vary widely across industries and sectors of the economy, there is a wide variation in the inflation rates of the physical goods people buy and the services they consume. The Consumer Price Index for services is up by 3.6 percent over the previous year. In the case of durable goods, it is up 13.2 per cent. And those goods represent a larger portion of America’s consumer spending than they did before Covid-19 hit.

On the eve of the pandemic, about 31 percent of US consumer spending went to goods and the rest to services. In September, that share had risen to around 35 per cent, slightly below the pandemic high. Those few percentage points made a huge difference for supply chains, which were suddenly moving record-breaking levels of toys, electronics and other goods from country to country, and were under stress under load.

White House Council of Economic Member Jared Bernstein, the $1.9 trillion rescue plan “juices demand, and crucially for the inflation story, individually driven by low consumption of services and increased demand for manufactured goods,” advisers. Weeks said in a speech.

“That, along with the virus’s impact on transportation logistics, has played a role in higher price increases.”

Mr Powell offered a similar diagnosis at the White House on Monday. “The economy is expanding at its fastest pace in many years, promising a return to maximum employment,” he said. “Challenges and opportunities remain as always. The continuing effects of the pandemic, as well as the unprecedented reopening of the economy, have led to supply and demand imbalances, bottlenecks and a surge in inflation. ,

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Mr Bernstein, his White House aides and several liberal economists say price hikes should ease by next year. The current bout, while painful for consumers, is better than an alternative scenario, where no rescue package was passed and the economy bounced back more slowly this year, he says.

“Avoiding a deep recession is a huge positive that needs to be balanced against the inflation we are seeing right now. There is a deep denial about it,” said JW Mason, an economist at the John Jay College of Criminal Justice, City University of New York, who is a fellow at the liberal Roosevelt Institute. He continued, “I don’t think there is a world where you get very little inflation where you don’t even get much economic hardship.”

That tension has left White House officials to attempt to calm rising prices largely by trying to address supply problems. In the spring, he introduced a strategy to deal with the continued high demand for products including semiconductors (which were crippling automotive production and raising car prices), timber (which was raising the cost of building homes) and food. Supply Chain Task Force set up.

The administration has stepped up those efforts over the past month, announcing new actions and spending to reduce backlogs at ports and speeding up the gummed-up global flow of products that has hit most of the wealthy world’s economy. has contributed to the rise in inflation. On Tuesday, Mr Biden announced he would release 50 million barrels of oil from the country’s strategic reserve, along with five other countries, to reduce gasoline prices, which have risen in recent months as drivers return to the roads. went.

But officials have found that there are some big levers they can pull quickly to reduce shipping delays that have driven up prices of goods. Administration economists say they are considering all options for more action and are promoting some recent progress in reducing backlogs at ports. The lack of specific details – or even views from business groups or elsewhere – that other policies can quickly clean up supply chains is telling. Mr Biden’s recent meeting on the subject with leaders of 14 countries at the Group of 20 summit in Rome did not yield any game-changing agreement on action.

In the meantime, Mr Biden’s team expects the Fed to keep its patience with the recovery, and not back down too quickly on its efforts to continue economic growth. One reason Mr. Biden tapped Mr. Powell for another term, rather than elevate Lyle Brainard, to the Fed governor he chose as vice president, was the belief that Mr. Powell – a Republican appointee – held a unique bipartisan credibility to him. The action is being taken at a time when Republicans are attacking Biden over rising prices.

“At times like these, we need stable, tested, principled leadership at the Fed,” Mr Biden said on Monday. He added, without elaboration, but with a clear intention: “And we need people of character and integrity who can be relied upon to focus our attention on the true long-term goals of our country – for our country.” “

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