The bite will have to be patient with inflation

Customers line up to check out a grocery store in San Francisco, California, USA, on Thursday, November 11, 2021.

David Paul Morris | Bloomberg | Getty Images

After lying dormant for years, inflation is once again scraping into US wallets, and it has become a major concern for the White House.

In recent months, the Biden administration has stepped up its efforts to address the supply chain disruptions that economists owe to hot inflation. And President Joe Biden has pushed his economic agenda as a remedy against inflation concerns.

But ask investors, economists and the American people about their thoughts on inflation, and no one can see inflation cooling off right now. This means that everyone from the president to the general electorate is likely to need patience to get through this.

“I do not think you want to promise people that inflation will go away,” said Jason Furman, an economist and former chairman of the White House Council of Economic Advisers under the Obama administration.

“I think the hardest thing about communicating is that not all problems have a solution. Part of what needs to be done to heal our economy is to be patient,” he continued. “It’s a really difficult message for any president to deliver. They need to be seen as doing things.”

Pricing policy

Rising food and gas prices are burdening Americans living on fixed or modest incomes. Retail grocery prices rose 1% in October, laundry and dry cleaning costs rose 6.9% year-on-year, and in some parts of California, gasoline is being sold north of $ 6 a day. gallon. General Mills announced retailers are planning to raise prices on dozens of its brands soon, including Cheerios, Wheaties and Annie’s, according to a report released Tuesday.

On the other hand, the inflation announcement coming out of the White House has focused heavily on two large, Biden-backed bills. One of the president’s favorite responses to inflation concerns is to point out that many economists say his $ 1.75 trillion Build Back Better bill and a separate $ 1 trillion infrastructure plan will make businesses and workers more productive and ease long-term inflationary pressures.

While better roads, access to child care and weather can help reduce costs for several years to come, Democrats face critical midterm elections in less than 12 months.

Inflation appeared to be an obstacle for Democrat Terry McAuliffe, who lost to Republican Glenn Youngkin in Virginia’s recent gubernatorial election.

CNBC politics

Read more about CNBC’s political coverage:

Political strategists viewed the election as a measure of voters’ attitudes toward current policies with Democrats in control of the White House and Congress. The high-profile democratic defeat in an increasingly blue Virginia is believed to have triggered a compromise between party centrists and progressives on infrastructure and anti-poverty and climate bills.

Americans’ anxiety about the economy, measured by the percentage of respondents who cite any economic problem as the biggest problem facing the United States, reached a pandemic era, according to polling firm Gallup. (The study examined a random sample of 815 adults, and it had a margin of error of plus or minus 4 percentage points.)

Twenty-six percent of Americans now cite an economic concern as the country’s biggest problem, while 7% say inflation is specifically their biggest concern. In September, only 1% of Americans mentioned inflation as their biggest concern, Gallup said. It is more than 20 years ago that inflation was identified as the main problem by at least 7% of Americans.

“Mothers and fathers are worried and ask, ‘Will there be enough food we can afford to buy for the holidays? Will we be able to get Christmas presents for the kids on time?'” Biden said in a speech Tuesday.

No major impact on the gas

To help ease fuel costs during the holiday season, Biden announced that the United States and some of its allies will utilize their national strategic petroleum reserves.

“The fact is, we’ve faced even worse increases before just in the last decade,” Biden said of rising gas prices. “But that does not mean we have to just stand still and wait for prices to fall by themselves.”

While the Biden administration said it would put 50 million barrels of oil from government stocks into global markets in the coming weeks, some analysts warned that the action is likely at best to be an attempt to pacify consumers.

Utilizing the country’s oil reserves will have a limited impact on fuel costs, as “almost 40% of the 50MM barrel release was already planned for 2022, as well as the fact that much of the oil will simply go into commercial stocks,” wrote Tom Essaye, founder of Sevens Report, a market research firm.

This oil will eventually be repurchased “and later returned to SPR, meaning the move is largely symbolic and will not have a major impact on actual physical markets,” he added.

Furman, who teaches economics at Harvard University, agreed. He said drawing on the SPR falls into the “no-stone-left-facing” category of a White House concerned about the political implications of rising prices.

Current inflation, he said, is a function of broad shifts in aggregate demand and aggregate supply – in addition to the impact of a one-time call for SPRs or any other quick fix.

Inflation expectations

An annoying feature of inflation is that today’s price increases are a product of what people think prices will be tomorrow. In other words, inflation expectations can in themselves cause inflation.

According to the New York Federal Reserve Bank’s latest consumer survey, median inflation expectations rose in October to 5.7% for the coming year, the highest level ever since the series began in 2013.

A measure of investors’ expectations of inflation over the next five years has risen in recent months.

The difference between the yields on five-year government bonds with inflation-protected securities or TIPS and the corresponding government bonds hit 3.17 on Wednesday, the highest level since at least 2003. This means that investors believe that inflation will average around 3% over next five years.

The recent rise in market-based inflation expectations attracted the attention of Federal Reserve officials during their November political meeting. Their minutes, released on Wednesday, showed that some central bankers saw the jump as evidence that rising inflation forecasts were beginning to become mainstream.

“A few participants pointed to increases in survey and market-based indicators of expected inflation – including the notable increase in the five-year TIPS-based target of inflation compensation – as possible signs that inflation expectations were deteriorating.” The Fed protocol read.

“I have taught my students the model that would have helped them predict inflation this year. And that model is that if you are very short on demand, then extra demand can help,” he said.

“But if you try to push it too far, you run into a supply constraint,” he continued. “You end up with higher prices instead of higher volumes.”

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