Biden administration seeks to thread needle on inflation
President Biden’s top economic officials and the Federal Reserve are trying to sell the benefits of inflation while soothing concerns about the potential risks as the economy emerges from the coronavirus downturn.
Before the COVID-19 pandemic, economists fretted for years over the tepid pace of wage increases and the persistently low inflation that helped suppress workers’ salaries. But with the U.S. now seeing both prices and wages rise at much faster rates, policymakers are attempting to keep Americans patient with an economic recovery pushing inflation higher.
For the Fed, the jump in prices is far from unexpected or even unwelcome. The central bank last summer adopted a new approach that called for letting inflation — which had undershot the Fed’s target for years — to run slightly above the annual 2 percent goal long enough to make up for tepid wage growth and pre-pandemic underemployment.
The Biden administration has also embraced the upward pressure on wages, dismissing the rate of price increases as a fleeting quirk of the COVID-19 recovery.
“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build and become endemic,” Treasury Secretary Janet Yellen told The New York Times on Sunday. “Looking at wage increases, you can have a wage price spiral, so you need to be careful.”
However, the former Fed chair added, “I do not see that happening now.”
Economists generally agree that the risk of a rampant inflationary spiral akin to the 1970s is remote thanks to lessons learned and major structural changes to the global economy. Even so, the recent rise poses considerable political challenges for both Biden and Federal Reserve Chairman Jerome Powell that could lead to policy obstacles.
“Even if you don’t think it’s a problem, and I don’t think it’s a problem for the economy, it creates problems for the Fed and pressure on the Fed,” said Adam Ozimek, chief economist at Upwork.
“While I have as much confidence in Powell as anyone can have in a Fed chair, we have a lot of experience lately in the Federal Reserve raising rates too fast, and we know that people start to scream and shout when inflation even looks like it’s getting slightly above target.”
Republicans have evoked the trauma of stagflation in their attacks on Biden’s agenda, attempting to paint a president with the economic ambitions of President Franklin Roosevelt in the visage of President Carter. With the federal debt limit set to expire in July, several GOP lawmakers have warned that they plan to dig in for major spending concessions as Biden eyes trillions more in spending.
Some congressional Republicans are also pushing the Fed to reduce its monthly purchases of bonds, effectively pulling back monetary support for the U.S. economy, citing inflation concerns.
The Fed, however, has ruled out doing so until the country is much further along in recovering the more than 7 million jobs remaining from the pre-pandemic employment gap.
Though inflation is most commonly associated with the price spirals of the ’70s, economists generally agree that a moderate level of annual price and wage increases helps an economy keep expanding. The ideal level of annual inflation, which the Fed has determined is 2 percent, pushes businesses to become more productive and increase compensation for workers, but not to the point that it spurs excessive wage competition and strains profits, forcing firms to keep raising prices.
While inflation has traditionally risen as unemployment fell, it remained roughly 0.5 percentage points below the Fed’s target level even as the jobless rate hit a 50-year low of 3.5 percent in February 2020. It fell even further when the coronavirus pandemic derailed entire sectors of the economy and cratered demand for many services and goods.
As the U.S recovers from those depths, annual gauges of inflation have risen well above rates that would otherwise prompt alarm during a normal business cycle.
The personal consumption expenditures index minus food and fuel prices, the Fed’s preferred gauge, rose at an annualized rate of 3.1 percent in April, up from 1.4 percent in February. Average hourly earnings also rose 0.5 percent in May and wage growth hit a 2 percent annual rate, the Labor Department reported Friday.
Many experts, however, say there’s no great cause for concern.
Many of the forces behind rising prices are short-term supply constraints created by demand for certain goods such as computer products, automobiles and lumber outpacing the rate at which manufacturers can get factories running at full capacity again.
Daniel Alpert, managing partner at investment firm Westwood Capital, said that even when accounting for supply shortages, prices for many goods still have not recovered to December 2018 levels.
“There is no inflation in tradables that is detectable yet, unless you look at month over month for the last two months, which is obviously just reopening bottlenecks,” he said. “Over the longer term, going back a couple of years, it’s just not there.”
Progressive economists are incredulous that some would call for cutting back on economic support, particularly unemployment benefits that could be pushing wages higher, with many Americans still reeling from the pandemic-driven recession.
Rakeen Mabud, chief economist at Groundwork Collaborative, a progressive nonprofit, said it was far too soon to pull back relief at a time when the Black unemployment rate was still at a “crisis level” of 9.1 percent. The overall unemployment rate dropped to 5.8 percent in May, and to 5.1 percent for white Americans.
“We cannot let those misguided fears keep us from investing in the workers and families who make up our economy, because the cost of inaction right now, especially for the most marginalized communities, far outweighs the costs of manageable inflation,” she said.
Biden hasn’t objected to more than two dozen GOP governors pulling out of expanded federal unemployment benefits but is still pushing ahead with more than $4 trillion in proposed spending on infrastructure and social services. Fed officials have also waved off criticism of its handling of inflation and insist they will act when necessary, but not sooner.
While that may do little to quell concerns from inflation hawks, Upwork’s Ozimek said Biden and the Fed have little choice but to hold the line and wait for data to vindicate them.
“They’re kind of stuck,” Ozimek said. “They just have to stick it out for now and hopefully they can maintain enough consensus to ride through it.”
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