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Inflation will increase on the condition of the union tonight

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Inflation will increase on the condition of the union tonight

President Biden is expected to emphasize in his State of the Union address how far the economy has come since the pandemic slowdown, with plentiful jobs and rising wages. But he will also focus on his plans to help slow inflation, underscoring the challenge facing Democrats ahead of the midterm elections: inflation is too high, voters are angry, and the right and right to bring down prices is. The way is to slow down growth and hurt. labour market.

Mr Biden will outline a four-part plan to curb rapid price increases, including encouraging corporate competition and strengthening supply chains struggling to keep up with consumer demand. In particular, he will detail an effort to reduce ocean shipping costs, which have risen during the pandemic.

But White House policies have historically served as a backup line of defense when it comes to controlling inflation, which is primarily the job of the Federal Reserve. The central bank is set to move swiftly to raise interest rates in the coming months, making money more expensive to borrow and spend. Higher rates mean slowing hiring, wage increases and enough demand to offset the rise in prices.

It is possible that inflation may cool on its own this year enough for the Fed to be able to slowly slow the economy toward a sustainable path. But if price growth remains rapid, the Fed’s playbook on dealing with extreme heat is causing economic pain.

That’s why inflation — which is running at the fastest pace in 40 years — is a major liability for the Biden administration. It is undermining consumer confidence by cutting paychecks and creating sticker shock for consumers trying to buy groceries, couches or used cars. And the treatment could slow a solid economic rebound like Democrats are trying to make their pitch for re-election to voters.

“The biggest problem for President Biden is that there’s no good way to convey inflation,” said Jason Furman, a Harvard economist and former White House economic official during the Obama administration. “There’s not much he can do about it, but he can’t stand up there and say: The only solution here is patience and the Federal Reserve.”

My. Furman said the solutions the president had expected were “the right things” for the administration, adding that the nation “should not be under any illusions that this is going to add up to a lot in terms of rapid cooling”. net profits.

Mr Biden is expected to use his remarks on Tuesday to try to re-focus voters on the economic victory of his presidency.

The economy has added 6.6 million jobs since Mr Biden took office, unemployment is poised to fall below 4 percent and growth has been more rapid than in many other advanced economies. The strength and scope of the rebound has surprised economists and policymakers, who often launch credit relief packages under the Trump and Biden administrations for such a quick recovery.

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But some economists warned that the $1.9 trillion legislation the administration passed through Congress in March 2021 was too big and too poorly targeted, and that it would boost demand and help fuel rapid price gains. While fiscal policy alone was not the cause of inflation last year, it appears to have contributed to higher prices by encouraging more consumption.

As flush consumers spent vigorously in 2020 and past year, and homebound shoppers bought more items like easy chairs and computers instead of services like manicures and dining out, supply chains struggled to keep up.

The virus outbreak continued to shut factories, ports were closed, and there weren’t enough ships to get around. The perfect storm of strong buying and limited supply drove car prices particularly sharply high, with consumers waiting months for new dining room sets, and this meant that fancy bicycles were hard to find and buy.

And now, inflation has gone beyond just those goods hit by the pandemic.

With the cost of food, fuel, housing, vacations and furniture rising rapidly – ​​and the conflict in Russia threatens to raise gas prices further in the coming months, the situation is likely to get worse before it gets better.

While the White House spent the last year popping prices down, arguing they would fade with the pandemic as global supply chains correct themselves, almost a full year of high inflation readings tended to ignore proved to be much more. The cost of the climb is eating into the paycheck and helping drive Biden’s election numbers to the lowest point ever in his presidency.

“I don’t think it’s going to go away in a way that’s going to save the current 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 pace with the shock people are feeling in relation to inflation.”

The Fed is expected to raise interest rates to nearly zero at its meeting this month and officials have indicated they will do a series of hikes throughout the year, trying to put a lid on 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 difficult politically. The Fed could signal an economic pullback to coincide with this autumn’s election season, creating a double whammy for Democrats with central bank policy slowing job market progress, even as Inflation has not faded completely yet.

This could be especially true if the conflict in Ukraine sends fuel prices higher, further driving inflation and consumers expect prices to continue to rise sharply, some economists said.

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“The Fed will have to be more aggressive on inflation,” said Diane Swonk, chief economist at Grant Thornton. “It could bleed into the unemployment rate by the end of the year.”

Mr Furman said he thought it was more likely that the Fed’s actions would not cause too much pain this year, although they could begin to squeeze the job market in 2023. And Mr Dutta speculated that the Russian invasion of Ukraine could slow the central bank down somewhat, at least in the short term.

“The Fed basically has a choice – they can plunge the economy into recession, or they can let inflation run a bit,” Mr Dutta said. “They’re not going to risk a recession with the geopolitical situation we’re in.”

The conflict overseas could also give Biden and the Democrats a patriotic moment. So far, based on ABC/Washington Post poll results, Mr Biden’s sanctions have been well received by voters.

At the same time, higher gas pump prices as a result of the conflict could further undermine consumer confidence. Sentiment has shaken with price hike, and has become very sensitive to fuel cost. Based on a popular benchmark, the price of a barrel of gas climbed above $100 on Tuesday, the highest since 2014.

The question is whether, in the face of rising costs, the administration will be able to turn the bright spots – international cooperation and recent job spurts – into something main for consumers and voters.

The answer may depend on what happens next.

Annual price gains are expected to slow in the coming months as they are measured against relatively high readings from last year, and supply chain delays are somewhat eased. They could soften even further later this year if current higher commodity prices return to the most optimistic scenario.

If inflation subsides on its own and the Fed’s relatively short response is enough to bring it down further, the economy could be left with strong growth, a booming labor market, and a positive outlook in 2023.

But increasingly, inflation is expected to subside more slowly.

Economists at Goldman Sachs expect consumer price inflation to end at 4.6 percent by 2022, more than double the level before the pandemic. It would mark a recession – the measure now stands at 7.5 percent – but it would be much higher than the Fed’s usual target.

This would allow the administration to talk about a moderation in price gains, but it may not feel like a significant improvement for consumers as they are in the election.

“Inflation is always political, because it burns, even in a good economy,” Ms Swonk said. “It creates the sensation of chasing a moving target, which no one likes.”

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