Soaring Inflation Crushes Biden's Big Plans

By Yuval Rosenberg

Good evening! Another blow for the Biden
administration today in the form of an inflation reading that will
only add to the challenge of reviving the president’s economic
agenda. Also, the federal government reported its first monthly
budget surplus in two years. And the NBA saw a
blockbuster trade that boosted the Philadelphia
76ers' title hopes.

Inflation Hits 7.5%, Highest in 40
Years

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.

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