Soaring Inflation Crushes Biden's Big Plans

Inflation soared over the last year, the Department of Labor reported Thursday, with consumer prices rising 7.5% in January compared to 12 months earlier.

The higher-than-expected reading shows that inflation accelerated last month, dashing hopes that price increases were slowing while also raising the likelihood that the Federal Reserve will pursue an aggressive course of interest hikes this year.

The report also likely reduces the odds that Democrats will be able to make President Biden’s Build Back Better agenda a reality (more on that below).

The details: The Consumer Price Index for All Urban Consumers rose 7.5% in January on a 12-month basis, the largest increase since the period ending February 1982. Used car prices were one of the main drivers, rising 40.5% over the last year. Energy prices were up 27%, with gasoline prices rising 40%. Food prices rose by 7%, while medical services increased by a more modest 2.7%.

Subtracting volatile food and energy prices from the index, so-called core inflation rose by 6% over the last 12 months — less than the broader index, but still the highest reading in four decades.

On a monthly basis, the Consumer Price Index for All Urban Consumers rose 0.6% in January, coming in above expectations while matching December’s increase.

The reaction: Analysts said the report suggests that inflation may be sticking around for longer than expected. “A rapid cyclical acceleration in inflation is under way,” said Andrew Hunter of Capital Economics. “And with labor market conditions exceptionally tight, it is unlikely to abate any time soon.”

James Knightley, chief international economist at ING, said the elevated inflation rate — along with corporations’ ability to keep raising prices — should spur the Fed to act quickly. “Inflation is at a new 40-year high and it isn’t just the rate that should be worrying the Federal Reserve, but also the breadth of corporate pricing power,” he said. “With wages, commodity prices and supply-chain strains all contributing, the Fed will need to respond aggressively.”

Traders on Wall Street pushed the yield on the 10-year Treasury over 2%, to the highest level since before the Covid-19 pandemic. However, Edward Moya, senior market analyst at the trading firm OANDA, cautioned that the upward pressure on interest rates may fade soon. “Yields are going to go higher but not significantly higher,” he said. The gap between yields and the inflation rate will likely close a bit, but Wall Street still expects inflation to return to below 3%, and with demand for Treasuries expected to remain strong, the upward pressure on rates could be limited. “[T]here could be exhaustion in this move,” he added.

Some economists stuck to their view that inflation will start easing in the near term. “Inflation is still hot, and obviously uncomfortably high, but it’s at its peak, and as the pandemic winds down, as supply chains iron themselves out, inflation will moderate,” Mark Zandi, chief economist at Moody’s Analytics told The Washington Post.

A bigger hike coming? The Fed is expected to start raising interest rates in March, and today’s report provided more ammunition for those arguing that the bank should move aggressively by starting with a half-percentage-point hike right off the bat.

James Bullard, president of the Federal Reserve Bank of St. Louis, said Thursday that he would like to see the Fed raise rates by a full percentage point by early summer, over the course of three meetings. “I’d like to see 100 basis points in the bag by July 1,” Bullard told Bloomberg News. “I was already more hawkish but I have pulled up dramatically what I think the committee should do.”

He added: “You have got the highest inflation in 40 years and I think we are going to have to be far more nimble and far more reactive to data.”

Manchin’s Inflation Concerns Dampen Dem Hopes for Major Spending Plan

Democrats’ plans to resurrect some version of their Build Back Better social spending and climate package already appeared to be hanging by a thread, with some in the party acknowledging that they might have to shelve the roughly $1.7 trillion plan indefinitely while Congress turns to other items that will fill up the calendar for months. Thursday’s inflation report likely snipped a few more strands from that thread, making it even less likely that Democrats will be able to scrounge up the votes they’d need to pass a large and ambitious spending bill along the lines many in the party had envisioned.

Sen. Joe Manchin (D-WV), who effectively killed the last version of the Build Back Better Act when he announced in December that he couldn’t support it, on Thursday reiterated his concerns about inflation and his view that now is not the time for sweeping government spending plans.

“For months, I have been ringing the alarm bell about inflation. Once again, we are witnessing that the threat of inflation is real,” Manchin said in a statement. “It’s beyond time for the Federal Reserve to tackle this issue head on, and Congress and the Administration must proceed with caution before adding more fuel to an economy already on fire. As inflation and our $30 trillion in national debt continue a historic climb, only in Washington, DC do people seem to think that spending trillions more of taxpayers’ money will cure our problems, let alone inflation.”

The Biden administration and other Democrats have argued that inflation is projected to ease in the coming months and that their plan would help combat price increases by cutting the cost of prescription drugs and child care. They cite the views of 17 Nobel Prize-winning economists who said in September that the inflationary effect of the spending and tax package as it was constructed then “will be at most negligible.”

What Manchin wants: Democrats are reportedly considering ways to salvage elements of their sweeping plan, and Manchin on Thursday indicated in an interview with Hoppy Kercheval of WVMetroNews that he remains open to hiking tax rates on corporations and the wealthy, allowing Medicare to negotiate drug prices, raising the Social Security payroll tax cap and some spending on climate programs. He emphasized, though, that that government must bring down the national debt. “There’s a lot of good, well-intentioned ideas in there that we need to tackle sooner or later, but the bottom line is we’re not in a financial position to do it,” Manchin said of the Build Back Better plan. “Let’s get a tax bill that really puts us on the path to financial solvency.”

Manchin’s view “is more akin to a deficit-reduction package than one that ushers in the massive climate funding and changes to the social safety net that Democrats once envisioned,” Politico’s Burgess Everett writes. “Rather than start with spending priorities and then evaluating how to pay for them, Manchin wants to start with tax reform as the goal of any party-line effort. He’s also insisting that social programs go through typical committee consideration, which allows Republicans more input. And he doesn’t just want it fully paid for; he wants it to significantly cut the deficit and put debt on a ‘downward trajectory.’”

The bottom line: Democrats’ best hopes may be in crafting a deficit-reduction bill that addresses some of their priorities. “My hunch is that our only path forward is a bill that is fully paid for, frankly that generates additional revenue that can be used to reduce the debt and deficits, and that directly reduces consumer prices,” said Senator Chris Coons (D-DE), according to Bloomberg.

Yet Manchin’s vision would likely face a host of challenges, too. Sen. Kyrsten Sinema (D-AZ) blocked a previous plan to raise tax rates, for example, and would likely be an obstacle to ending the carried interest loophole that Manchin wants to close. A 28% capital gains tax rate and Medicare drug-price negotiating power would also face some resistance. Democrats may still look to put together some kind of reconciliation package, but the process could well take months — and Thursday’s inflation numbers only reinforced Manchin’s concerns, highlighting how difficult the path forward will be.

Chart of the Day: Where Renters’ Assistance Is Coming Up Short

Congress provided about $46 billion for an Emergency Rental Assistance program to help keep renters in their homes through the pandemic. In an opinion piece at The New York Times, Dr. Sema K. Sgaier and Staci Sutermaster of Surgo Ventures, a nonprofit health organization, write that the program “is fundamentally flawed.” They warn than the government’s formula for distributing aid money “could leave hundreds of thousands of renters facing eviction across half the states.” Some states have gotten far more money than they need while others, like New York, could soon run out.

The chart below shows the 25 states that the authors say need more aid. In all, Sgaier and Sutermaster estimate than an additional $7.5 billion is needed to make sure renters’ needs are met nationwide.

First Budget Surplus in Two Years

The federal government recorded a $119 billion budget surplus in January, the first monthly surplus in more than two years. The Treasury Department said that a reduction in pandemic relief and stimulus spending, along with strong tax revenues, contributed to the surplus. The last monthly surplus was in September 2019, when revenues exceeded outlays by $83 billion.

• As Inflation Broadens, There Is More Risk That It Will Linger. – New York Times
• Inflation Keeps Getting Worse: A Peek Inside the Mounting Trouble for the Fed and Biden – Politico
• Senator Manchin Casts More Doubt on Biden’s Agenda With Blast on Inflation – Bloomberg
• Manchin Urges Democrats to Nix Trump Tax Cuts to Cool Skyrocketing Inflation – Washington Times
• Manchin Says He Supports Increasing the Amount of Income That Could Be Taxed to Fund Social Security From $147,000 to $400,000 – Politico
• Democrats Nudge Biden to Prioritize Climate 'Chunk' of Build Back Better Agenda – Washington Examiner
• Inside Schumer’s Frayed Relationship With Manchin – Axios
• No, the Federal Government Isn’t Spending $30 Million on ‘Crack Pipes’ – Washington Post
• Elon Musk's US Tax Bill: $11 Billion. Tesla's: $0 – CNN Business
• Masks Come Off in More States, but Not Everyone Is Grinning – New York Times