The high rate of inflation has politically damaged President Joe Biden and undercut support for spending proposals from the White House and congressional Democrats…writes Ashok Nilakantan
Inflation has virtually exploded in the United States, touching 13 per cent with the wholesale price index breaching double digits at 11.3 per cent and the consumer price index soaring to 9.1 per cent, making life pretty much tough for the average citizen in the country.
Inflation as measured by producer wholesale prices ticked up to a red-hot 11.3 per cent for the year ending in June, near the highest record, according to a report from the Bureau of Labor Statistics.
Thursday’s report comes a day after headline inflation as measured by the consumer price index exploded to 9.1 per cent for the 12 months ending in June, the highest level since 1981 and a bigger increase than expected, economics reporters in the Washington Examiner wrote.
Average real earnings dipped 3.6 per cent in past year as inflation hit workers
The new producer price index numbers are just another indicator that prices are wildly out of control even as the Federal Reserve moves ever more aggressively to jack up interest rates to rein in the country’s historic inflation.
The last time the Federal Bank increased interest rates by a record 75 basis points, the highest so far.
The PPI gauges the wholesale prices of goods, which are eventually passed down to consumers.
“Despite a modest improvement in supply conditions, price pressures will remain uncomfortable in the near term and bolster the Fed’s resolve to prevent inflation from becoming entrenched in the economy,” said economists with Oxford Economics.
The high rate of inflation has politically damaged President Joe Biden and undercut support for spending proposals from the White House and congressional Democrats.
Last month, the central bank hiked its interest rate target by a whopping three-fourth of a percentage point for the first time since 1994. The Fed typically raises rates by a quarter of a percentage point, or 25 basis points, so the June hike of 75 basis points was analogous to three simultaneous rate increases.
The Federal Bank, set to meet again later this month, will in all likelihood raise its rate target by another 75 basis points, making it 150 basis points in two months, an all-time record, though some analysts warn the central bank could become aggressive and raise interest rates by a full percentage point if inflationary pressures on the economy do not recede.
Nomura, a major Japanese financial holding company, predicts that the Fed will raise rates by 100 basis points, given Wednesday’s hotter-than-anticipated inflation reading.
There are concerns that the Fed’s aggressive cycle of rate hiking will knock the economy into a recession, fears that worsen as inflation keeps growing higher and the Fed keeps having to take a more hawkish approach to monetary policy.
The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”.
Two straight quarters of downward growth are typically viewed as recessionary by many economists, the Washington Examiner economists said.
The economy contracted at a 1.6 per cent annual rate in the first quarter, and last week, the Atlanta Fed’s ‘GDP Now’ tracker predicted that GDP growth will decrease in a second straight quarter, which would likely indicate that the country is in a recession.
High inflation does not augur well for President Biden, especially in the year of midterm elections.
Inflation figures may sink Biden and dozens of Democratic candidates in the midterm elections this year despite the President’s talking points about healthy employment figures or social issues such as abortion or gun control.
The midterms are usually considered a referendum for an incumbent President’s governance. There are alarming reports that the nation’s youth between 18 and 30 are virtually “fed up” of old rulers — Biden and Trump in their 70s — as they feel the nation needs younger blood to tackle various problems confronting the country, from gun control to abortion rights and inflation. Unemployment is a raging issue with them.
The White House warned earlier this week that it expected high inflation, but likely not the enormous 9.1 per cent year-on-year (YOY) figure that was announced on Wednesday morning. The grocery store and gas station headaches reflected in that figure will supersede any other concerns for voters this fall, argued Republican strategist Doug Heye. Gas prices have touched record highs of $6 to a gallon from the pre covid and during the price of $3 per gallon almost double.
“Every day, Americans have sticker shock whenever they spend money on anything,” the Examiner said.
“Every time they go to the grocery store, something is more expensive than it was the last time they were there. And that’s really hitting home.”
Biden has sought to deflect attention away from inflation for nearly a year, arguing it would be transitory, that other aspects of the economy are strong, or that the blame lies with Russian President Vladimir Putin and oil companies.
The President has also talked up other issues for the midterm elections, for example saying that “this fall, Roe is on the ballot” and pushing for gun control, both a virtual direct reference to conservative rulings on abortion rights and gun access by 2nd amendment by the supreme court by majority. Biden signed an executive order on abortion rights.
In a statement on Wednesday, Biden acknowledged that 9.1 per cent inflation is “unacceptably high” but “also out of date” because gas prices went down over the last month, and pointing out that inflation is also high in other countries.
“Inflation is our most pressing economic challenge. It is hitting almost every country in the world. It is little comfort to Americans to know that inflation is also high in Europe, and higher in many countries there than in America. But it is a reminder that all major economies are battling this COVID-related challenge, made worse by Putin’s unconscionable aggression,” Biden’s statement read.
Despite Biden’s statements before and after the numbers were released, economists say people have a right to be worried about inflation numbers not seen since the early days of the Reagan administration.
“With their sentiment at the lowest level in years, consumers have a right to be highly distraught,” said Mark Hamrick, a senior economic analyst at Bankrate.
“They’re facing a combination of high and sustained inflation robbing them of purchasing power.”
Biden says tackling inflation is his top priority, but the trend has only been upward since he took office. Inflation stood at 1.4 per cent the month he was sworn in, reaching 5 per cent by May 2021, 7 per cent by November, 8.5 per cent in April, and now 9.1 per cent.
Still, some Left-leaning economists continue to argue that inflation is mostly related to lockdown-related supply chain issues and that the Federal Reserve may only make things worse with continued interest rate hikes.
“I’m definitely a dove in [hiking interest rates],” said Gerald Friedman, professor at the University of Massachusetts.
“We should just roll with the inflation, live with it, and give businesses time to start adjusting their supply chains. Eventually, the Russians will leave Ukraine, and the world will start getting back to normal.”
Friedman argued that supply chain kinks will work themselves out, eventually, though it may happen far too late for voters looking for solutions to rising prices this fall. But presidents tend to get credit or take blame for the economy, which seems to be taking place as Biden’s approval ratings sink below 30 per cent in some polls.
“Even when the economy is doing badly, 90 per cent of the labor force has jobs. Those people may not care that much if a few other people are getting jobs. But they do care when prices at the gas pump are higher,” said Friedman.
ALSO READ: US House votes for India sanctions waiver
[soliloquy id="151345"]