Good evening. President Biden today declared a ‘major disaster’ in Hawaii, where wildfires raging across Maui have left at least 36 people dead. Biden also asked Congress to provide nearly $40 billion in supplemental funding, including another $24 billion to support Ukraine and its neighbors in the war against Russia, $12 billion for ongoing disaster relief and $4 billion for border security. The Ukraine funding includes $13 billion in military aid and $7.3 billion in economic and humanitarian help.
Here’s what else is happening.
Inflation Ticks Higher, but Details Bolster Hopes for a Soft Landing
The Consumer Price Index rose 3.2% in July on an annual basis, the Bureau of Labor Statistics reported Thursday. While the topline number edged higher for the first time in 13 months, the underlying data indicate that inflation continues to moderate, bolstering hopes that the Federal Reserve can pull off a recession-free soft landing for the U.S. economy.
On a monthly basis, prices rose 0.2% in July, equaling the June number, as expected. Perhaps more encouragingly, the closely watched core CPI, a measure of inflation that leaves out volatile food and energy prices, dropped a tenth of a percentage point to 4.7% on an annual basis. The monthly core CPI number equaled the broader measure of 0.2% — the same as in June and tied for the lowest result in two years.
The largest single factor in the inflation number was housing, with shelter costs accounting for 90% of the increase, per Bloomberg. Some factors that contributed to the initial inflationary surge fell, however, with used cars dropping by 1.3% on a monthly basis.
Overall, the numbers have helped ease fears that inflation is rebounding significantly, which would likely push the Federal Reserve to raise interest rates even higher, increasing the risk of recession.
Dueling storylines: The inflation report supplied enough contradictory data to support both Republican and Democratic narratives. In a statement, President Joe Biden celebrated the news. “Annual inflation has fallen by around two thirds since last summer, and inflation outside of food and energy has fallen to its lowest level in any three-month period since September 2021,” he said. “We’ve made this progress while maintaining the broad strength of our economy.”
Republicans, on the other hand, emphasized the increase in the topline inflation number. “Today’s Consumer Price Index shows inflation ticked up over the last year and remains more than double what it was when Biden took office,” the Republican National Committee said.
Raising hopes for a Fed pause: Earlier this week, Philadelphia Fed President Patrick Harker joined a chorus of analysts who think that it’s time for the Fed to pause its relentless campaign of interest rates hikes aimed at slowing inflation. “I believe we may be at the point where we can be patient and hold rates steady,” Harker said in a Tuesday speech.
The Wall Street Journal’s Amara Omeokwe, Nick Timiraos and Christian Robles noted Thursday that the three-month annualized rate of inflation — a measure that some economists say gives a particularly good sense of the current dynamic around prices — is now 3.1%, the lowest point in two years and well below the 5% level recorded in May.
“My God, that’s incredible,” Laurence Meyer, a former Fed governor, told the Journal. “There’s absolutely no question that core inflation has turned the corner faster” than anticipated.
Joseph Brusuelas, chief economist at the consulting firm RSM, said the latest inflation report “supports a Fed pause at its September policy meeting & is further good economic news given where inflation stood one year ago.”
There could be bumps ahead: Former PIMCO chief Mohamed A. El-Erian said Thursday that only time will tell if the soft landing scenario for the U.S. economy becomes reality. “There is certainly a lot to like in the latest CPI report,” he wrote at Bloomberg. “There is also need, however, for greater care in simply extrapolating its path given some price developments in the pipeline.”
Most notably, energy and food prices have been rising recently, and “it’s just a matter of time until the pass-through effects are felt in the prices of a wider set of goods and services,” El-Erian said. The ultimate effect could simply be a moderation of the disinflationary trend. At the same time, the price increases could push inflation higher again, raising difficult questions for the Fed about how to deal with a new round of price hikes.
In a research note titled “Inflation still too hot,” Diane Swonk, chief economist at KPMG, also took a cautious approach, saying that she expects interest rates to remain high for some time, despite recent progress. “Inflation is cooling, but the path down is still expected to be bumpy and littered with potholes,” she wrote. “The Fed has hit its peak in rates but is expected to remain reluctant to declare victory at its next meeting in September. No cut in rates is expected until May.”
Numbers of the Day: $1.6 Trillion and 10%
The federal budget deficit for the first 10 months of fiscal year 2023 topped $1.6 trillion, including $221 billion in July, according to data released Thursday by the Treasury Department. That gap amounts to $5.3 billion per day and exceeds the $1.4 trillion deficit for all of fiscal 2022.
U.S. government receipts from October 2022 through July 2023 came to nearly $3.7 trillion, a drop of more than 10% compared to the same period a year earlier. Outlays totaled more than $5.3 trillion, an increase of about 10% from the prior year.
“We are watching deficits climb, debt soar, and the Social Security and Medicare trust funds near exhaustion,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonprofit that advocates for deficit reduction. “And even though we achieved actual savings with the Fiscal Responsibility Act, lawmakers are already trying to reward themselves with cake after having their first salad in a decade – considering massive tax cuts and further spending increases that could erode away all of the FRA’s savings.”
How House Republicans Might Avoid a Shutdown: Rely on Democrats
If Congress is going to avoid a partial government shutdown after current federal funding runs out on September 30, the Republican-controlled House will have to pass either a bipartisan spending deal or a stopgap measure to keep agencies open. The problem with that, as Politico’s Sarah Ferris and Nicholas Wu report, is that GOP conservatives “are signaling they’ll be loath to support either solution, almost certainly putting the onus on House Minority Leader Hakeem Jeffries and his Democrats to help avert disaster.”
In gaming out how a shutdown might just maybe, possibly, potentially be avoided, Ferris and Wu note that Democrats will likely need to do more than just supply votes for a spending bill that comes to the House floor — they will probably have to help get the bill through the procedural steps it takes to reach the floor. “Democrats may have to step in to end a conservative blockade of several other high-stakes bills this fall, from a new farm bill to a foreign surveillance measure to Ukraine aid,” the Politico authors add.
Relying on Democratic votes could spell trouble for House Speaker Kevin McCarthy, who angered his far-right members by agreeing to a debt-limit deal that passed the lower chamber with more support from Democrats than from his own party.
But Politico reports that many Democrats say they would be likely to step up again in support of a stopgap bill as long as it does not include any conservative poison pill measures, such as ones targeting abortion access or diversity efforts. If the 12 annual appropriations bills aren’t enacted by the end of the year, a 1% across-the-board spending cut would take effect, hitting both the defense and non-defense sides of the budget. Some on the left reportedly see that as a better outcome than the steep cuts pushed by House Republicans. “Though that kind of temporary Band-Aid is typically scorned by spending leaders, some Democrats — particularly progressives — see it as a chance to preserve many of their own policies and spending levels,” Ferris and Wu report.
The bottom line: It won’t be easy to avoid a shutdown.
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Fiscal News Roundup
- Biden Seeks Nearly $40 Billion in Funding for Ukraine, Disaster Relief and Border – CNBC
- Biden Administration Seeks Billions More in Ukraine Aid, Teeing Up Congressional Fight – ABC News
- From Eggs to Electronics to Used Cars, Consumer Inflation Eased Its Grip on US Households in July – Associated Press
- Cooler July Inflation Opens Door to Fed Pause on Rates – Wall Street Journal
- Fed Seen Pausing After Tame CPI Data, But Mission Not Over – Bloomberg
- Supreme Court Pauses Purdue Pharma $6 Billion Settlement Plan – Washington Post
- Some Republicans Crack Open Door to Child Tax Credit Compromise – Roll Call
- Seniors’ Medical Debt Soars to $54 Billion in Unpaid Bills – The Hill
- Biden Administration Warns States as Millions Lose Medicaid – Politico
- House GOP Weighs Shutdown Escape Hatch: A Deal With Dems – Politico
- IRS Unable to Locate Millions of Tax Records, Watchdog Says – Politico
- Joe Manchin Says He’s Thinking ‘Seriously’ About Becoming an Independent – Washington Post
- Percentage of US Adults With Long COVID Falls to 6%: CDC – ABC News
Views and Analysis
- Inflation’s Getting Better but Voters Just See Higher Prices – Reade Pickert, Bloomberg
- Why Consumers Don’t Share Economists’ Optimism About Inflation – Sam Sutton, Politico
- Good News on Inflation Comes With an Asterisk – Mohamed A. El-Erian, Bloomberg
- Why the Inflation Report Is Better Than It Looks – Eli Okun, Politico
- Paperwork Mistakes Should Not End a Child’s Health Coverage – Washington Post Editorial Board
- The Single Thing Larry Summers Gets Right About ‘Bidenomics’ – Josh Bivens, Economic Policy Institute
- Drugs Like Wegovy Could Be Revolutionary — if We Can Afford Them – Megan McArdle, Washington Post
- Coal Country Voters Demand Nothing From the GOP. That’s What They Get – Paul Waldman, Washington Post
- The Great American Hospital Shell Game – Maureen Tkacik, American Prospect
- Why the Uptick in Covid Cases Isn’t Cause for Alarm – Leana S. Wen, Washington Post