Analysts say President Biden’s $2 trillion spending bet to reshape the US economy won’t do much to exacerbate the worst of inflation in 31 years, but it will give Americans any respite from high prices. will not give
The inflationary impact of the so-called Build Back Better Plan has become the focus of a fierce battle in Washington as Democrats push against stiff Republican opposition to get their heated election spending bill to the finish line. The House passed the bill Friday morning, but Senate approval is not certain.
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Economists say there is little doubt that a massive fiscal stimulus during the pandemic helped push consumer prices up by 6.2% in the 12 months ending October. The Trump and Biden administrations invested about $5 trillion in the economy in a year and a half.
Conversely, the money spent in the Build Back Better plan will be spread over 10 years. He says this will limit its impact on inflation in the short term.
“The majority of this spending is going to kick in a few years down the road,” said Gus Faucher, chief economist at PNC Financial Services.
fight for inflation
Republicans have blamed Biden for the rapidly rising cost of living, amid rising public concerns about inflation. They argue that their plan will drive up prices further and hurt families who are already paying more for gas, food, rent and many other things.
Democrats have repackaged their spending bonuses as an anti-inflationary tool to gain public support.
They cite a letter from 17 Nobel laureates in economics – almost all major liberals – as saying that the plan would ease price pressures in the long run. The president’s press secretary even accused Republicans of favoring higher inflation.
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Inflation forecasters — people who get paid to call — aren’t buying it. They don’t see the Democratic spending plan as having much effect on current inflation one way or another.
Anita Markoska, Chief Economist of Jefferies Group, said, “It will not affect inflation as we have already seen, but it is not going to provide any relief either. She was the first on Wall Street to warn of a steep rise in prices earlier this year due to Washington’s spending policies.
The fate of the bill ultimately depends not on what economists say, but on public perceptions and the mindset of a prominent Democratic senator, Joe Manchin of West Virginia.
The conservative Democrat, who is often at odds with his party, worries that another influx of federal spending will widen the record US fiscal deficit and push inflation even higher. He has not committed to approving the bill in the 50-50 Senate.
role of incentive
Washington is not innocent when it comes to price spikes. Economists say there is little doubt that the seeds of the current spike in inflation were planted by government actions during the pandemic.
The Federal Reserve got the ball rolling by lowering interest rates to record lows and making it cheaper for businesses to take out loans or for consumers to buy a car or home.
Then the Trump and Biden administrations jumped in with multi-trillion dollar stimulus packages that pumped massive amounts of money into the economy all at once.
All the incentives put a lot of money in people’s pockets and raised consumer spending above crisis levels. American households are also sitting on more than $2 trillion in additional savings that will eventually be spent.
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A boom in demand for pentup surprised businesses in the spring. They cut production early in the pandemic and were unprepared to deal with a sudden influx of consumer spending, especially with the coronavirus still disrupting global trade and making it harder to get supplies.
Nor could businesses find and retain enough workers to produce all the goods and services that customers wanted with so many people still worried about the coronavirus having to go back to work. The incentive money helped him stay at home.
Labor and supply shortages have caused the biggest increase in inflation since the 1990s. Prices are rising three to four times faster than before the pandemic.
Steve Blitz, chief economist at TS Lombard, said, “All of the incentives have created a “spending boom that has contributed to supply chain issues and inefficiencies of production.”
Some economists say the last major government stimulus in March may be overkill.
The Biden administration approved a $1.9 trillion plan — without any Republican support — that sent a $1,400 check to most families and included other major spending.
“The legislation in March gave it a big boost,” Markowska said. At the time, the annual rate of inflation was 2.6% – and was rising.
The rise in inflation doesn’t mean the March stimulus was all but useless, though. The economy was still in dire straits, with millions out of work and it was unclear when the pandemic would end.
“It is easy to say that we should have given less incentive. Hindsight is perfect,” Faucher said. “But the economy is probably much better off without the stimulus.”
end of high inflation
Economists say the biggest impact on inflation over the next two years will not be government spending, but the ability of businesses to obtain labor and supply.
Most Wall Street forecasters forecast inflation to fall below 3% by next year as labor and supply shortages ease and federal spending returns to near historical trends. Federal outlays have increased by 50% from pre-crisis levels over the past two years.
“This inflation is ‘temporary’ because demand growth is ‘temporary,'” Blitz said, referring to the Fed characterizing the current spike in prices.
“Ultimately a lot of this backlog [household] Savings get spent, demand softens, production picks up and the price reverses,” he said.
Economists say the Build Back Better plan will not do much to reverse the path of inflation. While the amount spent may be comparable to the March stimulus, there is one big difference: The money will be spread over a decade.
Viewed from that perspective, it would add a few hundred billion dollars to government spending each year. Or about 5% of the pre-crisis level of the federal outlay.
The Build Back Better plan also includes some big tax increases, unlike previous Trump and Biden incentives. This will limit its effect on demand and inflation.
“If it drives up demand in one place, it drives up demand in another,” Markowska said.