Another spike in monthly price growth is posing a serious threat to the U.S. economy — and President Biden’s political prospects.
New consumer price index (CPI) inflation data to be released Friday is expected to show consumer prices rising at a faster rate between April and May, due largely to surging oil prices and their ripple effects throughout the economy. Shocks to the global food supply driven by the war in Ukraine and a sharp increase in summer travel and energy usage are other factors likely to push inflation even higher.
After months of downplaying inflation, inaccurately predicting its decline and blaming price growth on a wide range of outside forces, Biden and his top economic officials are coming to terms with the challenge in front of them.
Treasury Secretary Janet Yellen, one of the first Biden officials to admit she misread inflation, told lawmakers Wednesday that price growth was at “unacceptable levels” and called bringing inflation down the nation’s top priority.
But Yellen admitted Tuesday it would be “virtually impossible” for the U.S. to shield itself from one of the main forces behind high inflation: skyrocketing oil prices.
Yellen also broke from other administration officials and scores of Democratic lawmakers by saying high inflation had little to do with corporate greediness, a common refrain from lawmakers eager to deflect blame for inflation from the administration.
While the annual inflation rate is likely to hold even at 8.3 percent, according to consensus projections from economists, that’s still the fastest yearly increase in prices since the early 1980s. And even if inflation has peaked, Americans will still be dealing with quickly rising prices for months — if not years — without a sudden and potentially damaging shift in the economy.
“There’s always that debate: ‘Are we at peak? Are we past peak? Is it 8.5 [percent]? Is it going to be 8.6?’ ” said Gregory Daco, chief economist at EY-Parthenon, in a Wednesday interview.
“The average household, the average business doesn’t care whether the peak was 8.6 or 8.5 or whatever it may end up being. What they care about is what inflation is going to be in six months, a year’s time.”
There is little time for inflation to fall significantly before the midterm elections in November, when Democrats are predicted to lose their House and Senate majorities amid widespread voter dissatisfaction with the economy.
As inflation has risen, Biden’s approval ratings have fallen despite the addition of more than 10 million jobs since he took office in January 2021, steady consumer spending and rapid wage growth.
Daco said there are encouraging signs of some price pressures fading, particularly for consumer electronics, appliances, furniture and other goods that were in short supply and high demand for much of the past two years.
After scrambling to build up inventories, retailers such as Walmart and Target have begun discounting goods now too expensive and overbought to be sold at inflated prices.
Even so, he said prices for food, oil, travel, shelter and medical services — categories where many Americans may struggle to cut back on spending — show no signs of slowing down.
“You only notice car price inflation if you buy a car, right? You’re only going to notice the increase in furniture if you’re buying a new couch or if you’re buying a new dishwasher,” Daco said.
That dynamic doesn’t hold up when prices for staples such as groceries and gasoline keep rising.
Daco added that rising oil prices trickle through the economy by raising the costs of transportation and manufacturing — two energy-intensive forces boosting prices for suppliers and the consumers they’re scrambling to serve.
“Everyone uses a form of refined petroleum, whether it’s gas or diesel, or any other type of fuel. As a result, prices for most services actually embed some form of energy costs,” he said.
“The rise in fuel prices tends to have this insidious effect across a lot of consumer goods and services and prices, and as a result it’s much more visible.”
Higher inflation could also force the Federal Reserve to take much more drastic action to slow the pace of price growth. The Fed is already implementing a series of interest rate hikes meant to slow the economy into lower inflation, but economists fear the bank may need to raise rates high enough to cause a recession if inflation does not begin to fade quickly.
The Fed is also set to begin allowing trillions of dollars of bonds, which it purchased to stimulate the economy, to expire off its balance sheet, which has the practical effect of pulling money out of lending markets.
“The economy and the financial system have become accustomed to large Fed balance sheets and extremely low rates. Many investments and business decisions are made under the assumption that interest rates are going to be low for long. As a result, it is extremely difficult to tighten monetary policy without affecting the financial markets and the real economy,” said Kairong Xiao, an associate professor of finance at Columbia University, in a Wednesday email.