Administration

Five obstacles Biden faces in battle against inflation

President Biden was delivered a blow this week amid the news that inflation is rising and showing no signs of slowing down.  

The consumer price index rose 7.5 percent annually by the end of January, the fastest rate since 1982.  

Consumer spending has returned to pre-pandemic levels, but the rush of demand, lack of supply, and labor shortages and shipping bottlenecks have caused high inflation to linger. 

Here are five obstacles in Biden’s battle against inflation.

 

Pandemic-driven supply chain snarls  

The rapid recovery from the depths of the coronavirus recession has been too fast for many manufacturers, suppliers, retailers and shipping companies to handle. 

Consumer spending roared back to pre-pandemic levels in 2021 thanks to a combination of federal stimulus and effective COVID-19 vaccinations. But the intense demand, primarily for goods, overwhelmed supply chains still running with fewer workers and under far stricter pandemic containment restrictions abroad. 

The intense pressure on supply chains has left Americans paying more or waiting longer for many products, particularly automobiles and appliances hit by a global computer chip shortage. The Biden administration has also scrambled to clear up port backlogs, get more truckers on the road and loosen up supply chains — though it has limited reach beyond U.S. borders. 

Douglas Holtz-Eakin, an economic adviser to former President George W. Bush and the late Sen. John McCain (R-Ariz.), argued that the big impediment to fixing the supply chain is the ongoing COVID-19 pandemic. 

The Biden administration “basically took the eye off the ball in 2021. They didn’t do anything on tests for a year, they relied on vaccines as the silver bullet,” he said. “You need the full range of prevention and therapies in addition to vaccines, and I don’t think they’ve really done a full-court press on that.” 

While getting the pandemic under control could be pivotal to fixing the supply chain, protests over COVID-19 protocols that require drivers to be fully vaccinated to cross the U.S.-Canada border could worsen the situation. 

Truck drivers in Canada have staged a protest for two weeks and blocked the Ambassador Bridge in Ontario, which carries 25 percent of trade between the U.S. and Canada. Automakers, including General Motors and Stellantis, have had to cancel shifts at U.S. plants due to parts shortages, all while car prices reached new highs due to the chip shortage. 
 

Labor shortages 
 
The pandemic is boosting pressure on prices by making it harder for businesses to hire and retain workers. While the U.S. added 6.4 million jobs in 2021, businesses ended the year with more than 10 million open positions. Workers have also quit jobs, often to take another with better compensation or career opportunities, at a record rate — a phenomenon deemed the Great Resignation. 

As businesses wait for millions of workers who left the labor force in 2020 to return, many have boosted prices or cut back their operations. 

Matthew Darling, employment fellow at the Niskanen Center, compared the labor market to snarled supply chains: a system built on a steady supply of cheap, immediately delivered goods and services struggling to overcome obstacles created by the pandemic. 

“Places that were sort of built on the assumption that you can always hire a steady stream of minimum wage workers and they will be there are really, really struggling right now,” Darling said. 

“A lot of the problems that people are facing are the problems of a strong labor market,” he continued. “It’s hard to employ people in low-wage jobs because people are able to bargain up wages.” 

Child care, school closures and health concerns have all added to the labor shortages, particularly as the omicron variant ripped through the U.S.  

The Biden administration has argued that Americans want to get back to work and the shortages will improve. But others question how likely it is that those who left the workforce during the pandemic will want to return. 

 

Rents are rising  
 
After collapsing during the onset of the pandemic, rents rose 4.4 percent in the year since January 2021, and economists expect them to steam ahead. While house prices and rents have both been fueled for years by an affordable housing shortage, the latter is a key component of inflation and a major force behind the 7.5 percent annual inflation rate. 

Holtz-Eakin said the rise in so-called shelter inflation is due to the Biden administration stimulating the economy with the American Rescue Plan, the bill signed in March that pumped $1.9 trillion into the economy. 

“The big mistake was made in March,” he said. “They can’t unwind that. There’s no way to. There’s nothing they really can do that is going to be significant. They’re going to have to rely on the Fed to do its job to tap the brakes and bring inflation under control.” 

While most economists attribute some of the high inflation to Biden’s third round of stimulus checks, some fear looming rate hikes from the Fed will do little to solve the problem. 

“When we see supply shortages, we can tamp out our demand and make people poorer or we can boost supply,” said Rakeen Mabud, chief economist at Groundwork Collaborative, a progressive research nonprofit, in a Thursday call with reporters. “Investments that really have long-lasting positive repercussions will make our economy more resilient.” 

Biden’s Build Back Better plan included $150 billion meant to expand and repair affordable housing, but it is unclear if those funds could make it into a final deal that largely hinges on the approval of Sen. Joe Manchin (D-W.Va.) in a 50-50 Senate. 
 

Inflation momentum 
 
Economists have paid close attention to how high consumers and businesses expect inflation to rise since the rapid price increases of the 1970s.  

Steadily rising inflation led to what economists call a wage-price spiral: a cycle of workers requesting higher wages to cover rising prices, forcing businesses to boost prices to cover higher employment costs.  

Darling said the U.S. is not suffering from a wage-price spiral now despite a recent burst in wages. Wages are rising the fastest for low-earning workers in the service industry, he explained, but prices are rising fastest for goods such as automobiles, electronics and energy products. 

Even so, dozens of major companies behind grocery store staples are set to keep raising prices as their profits soar — drawing anger from liberals and action from the administration. 

The Biden administration has argued for months that inflation isn’t here to stay, and White House press secretary Jen Psaki stressed again on Friday the they think “inflation will come down, will moderate over the course of the year.”  

When asked what the White House is doing to combat inflation, Psaki pointed to efforts to address supply chains, rebuild manufacturing infrastructure, implement the bipartisan infrastructure law and continue to promote competition. 

 

Energy shocks 
 
Oil prices rose substantially in 2021 as the rapid recovery from the coronavirus recession fueled a surge of consumer demand for goods and travel following a sharp decline in oil prices during the peak of the pandemic in 2020. 

Gasoline prices rose 40 percent between January 2021 and January 2022, while used car and truck prices increased 40.5 percent and new vehicle prices rose by 12.2 percent.  

Tensions between Russia and Ukraine have escalated in recent days, and White House officials said on Friday that Russia could invade its neighbor any day. These potential events could further impact oil prices in the U.S. 

Russia is a significant source of U.S. energy imports. It was responsible for 7 percent of imported oil for the U.S in 2020, and it is a key supplier for European nations that may lean harder on America to make up for fuel unavailable from Russia in the event of war. 

Tags chip shortage Inflation Jen Psaki Joe Biden Joe Manchin John McCain labor shortage Oil prices Russia-Ukraine conflict supply and demand

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