The inflation error calculation complicates Biden’s agenda

WASHINGTON – President Biden’s top economists have been concerned since the beginning of his government that rising inflation could hamper the economy’s recovery from recession, along with his presidency. Last spring, Mr. Biden’s advisers made a forecast error that helped turn their fears into reality, a calculation that spread to this week’s decision to reappoint the Federal Reserve chair.

Administration officials overestimated how quickly Americans would start spending money on restaurants and amusement parks, and they underestimated how many people wanted to order new cars and sofas.

Mr. Biden’s advisers, along with economists and some scientists, believed that widespread availability of coronavirus vaccinations would accelerate the return to prepandemic life, a life where people ate out and filled hotel rooms for conferences, weddings and other personal events.

Instead, the emergence of the Delta variant of the virus over the summer and fall slowed the return to normalcy. Americans stayed home, continuing to buy goods online, straining global supply chains and skyrocketing the price of just about everything in the economy.

“Because of the strength of our economic recovery, American families have been able to purchase more products,” he said. Bite this month at the Port of Baltimore. “And – but guess what? They don’t have to go out to dinner and lunch and go to the local bars because of Covid. So what do they do? They stay home, they order online, and they buy products.”

That view is the closest the administration has offered an explanation for why the White House was surprised by the size and durability of a price increase that has hurt Mr. Biden’s polls and jeopardized part of his economic agenda in Congress. From the administration’s perspective, the problem is not that too much money is splashing around, as Republicans and some economists insist, but that consumers are throwing an unexpectedly large amount of that money after a narrow set of things to buy.

Put another way: If Mr Biden had sent people travel vouchers or DoorDash gift cards for services – instead of sending Americans direct payments as part of his $ 1.9 trillion rescue plan in March – the inflation picture could have looked different. now.

Inflation has risen across affluent nations over the past year, but it has risen faster in the United States, where prices rose 6.2 percent in October from a year earlier. America’s inflation has been exacerbated in part by Mr Biden and his predecessor, Donald J. Trump, pouring more fiscal support into the US economy than their counterparts did elsewhere, at a time when consumption patterns were changing and not rapidly declining. to normal.

Republicans, and even some left-wing economists such as former Obama administration officials Lawrence H. Summers and Jason Furman, have blamed the rapid price hikes across the economy on the aid package Mr Biden signed last spring. They say the package’s direct aid to Americans, including $ 1,400 checks for individuals and improved benefits for the unemployed, fueled more consumer demand than the economy could bear, driving prices up.

Sir. Biden is betting that these criticisms are largely wrong – and that the Fed would be wrong to follow their advice. His aides say that excess consumer demand is not the driving force behind the fastest price rises America has seen in decades, and that the economy needs more fuel, not less, to complete the job of delivering wage and employment gains to historically marginalized workers.

The president wants Fed Chairman Jerome H. Powell, whom he reappointed this week for another term, to join him in that bet – by avoiding rapid rate hikes that could stifle growth and that would not address what officials in the White House see. as the real cause of inflation: the virus.

“We are still dealing with the difficult challenges and complications caused by Covid-19, which is driving costs up for American families,” Mr Biden said Monday in the White House, announcing Mr Powell’s reappointment and blaming inflation. at the feet of the resurgent virus.

While prices have risen widely across industries and sectors of the economy, there is a huge gap in inflation rates for physical things people buy and the services they consume. The consumer price index for services has risen 3.6 per cent compared with the previous year. For durable goods, it is an increase of 13.2 percent. And these goods represent a much larger share of U.S. consumer spending than they did before Covid-19 hit.

On the eve of the pandemic, about 31 percent of U.S. consumption went to goods, and the rest to services. By September, the share had risen to about 35 percent, a slight drop from the heights of the pandemic. These few percentage points made a huge difference to supply chains, which suddenly carried record-breaking levels of toys, electronics and other goods from country to country, straining under the load.

The $ 1.9 trillion rescue plan “juiced demand, and most importantly for inflation history, much of the demand was reflected in reduced consumption of personal services and increased demand for manufactured goods,” Jared Bernstein, member of the White House Economic Council. Advisors, said in a speech this week.

“This, in line with the virus’ impact on transport logistics, has played a role in increased price growth.”

Sir. Powell made a similar diagnosis in the White House on Monday. “The economy is expanding at the fastest pace in many years and carries the promise of a return to maximum employment,” he said. “Challenges and opportunities remain as always. The unprecedented reopening of the economy, along with the continuing effects of the pandemic, led to supply and demand imbalances, bottlenecks and an outbreak of inflation.”

Sir. Bernstein, his White House colleagues and many liberal economists say price increases should slow to next year. The current battle, though painful for consumers, is better than an alternative scenario where no rescue package was adopted and the economy rose more slowly this year, they say.

“Avoiding a deep recession is a huge positive that needs to be balanced against the inflation we are seeing now. There is a deep denial of that,” said JW Mason, an economist at John Jay College of Criminal Justice, City University of New York, who is a fellow at the liberal Roosevelt Institute. He added: “I do not think there is a world where you get significantly less inflation, where you also do not get significantly more economic difficulties.”

This tension has left White House officials trying to soothe rising prices mainly by trying to alleviate supply problems. In the spring, they formed a task force for the supply chain to cope with the continuing high demand for products, including semiconductors (which paralyzed car production and sent up car prices), timber (which increased the cost of building homes) and food.

The administration has stepped up these efforts over the past month, announcing new measures and spending to reduce port backlogs and trying to accelerate the congested global flow of products that have contributed to rising inflation through much of the affluent world. On Tuesday, Mr. Biden said he would release 50 million barrels of oil from the nation’s strategic reserve, in a concerted move with five other nations to push down gas prices, which have risen as drivers return to the roads in recent months.

But officials have found that there are few large handles that they can quickly pull to ease the shipping delays that have pushed up commodity prices. Management economists say they are considering all options for more action and are promoting some recent progress in reducing port backlogs. The lack of specific details – or even floating ideas from business groups or elsewhere – about what other policies could quickly clear supply chains is telling. Sir. Biden’s recent meeting on the subject with leaders from 14 countries at the group’s summit in Rome produced no game-changing agreements on actions to be pursued.

Meanwhile, Mr Biden’s team is hopeful that the Fed will maintain its patience with the recovery and not retreat too quickly on its efforts to continue driving economic growth. One of the reasons Mr Biden appointed Mr Powell for another term, instead of elevating Lael Brainard, the Fed governor he elected as vice president, was the belief that Mr Powell – a Republican nominee has a unique bipartisan credibility for his actions at a time when Republicans are hammering Mr Biden over rising prices.

“In times like these, we need firm, tested, principled leadership in the Fed,” he said. Bid Monday. He added without elaboration, but with a clear intention: “And we need people with character and integrity who can be trusted to keep their focus on the right long-term goals for our country – for our country.”

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