Inflation rears its head amid spending debate

Economists are closely watching inflation data as prices begin to rise at their fastest pace in almost a decade.

The Consumer Price Index for March, released Tuesday, jumped a higher-than-expected 0.6 percent from February, the biggest monthly increase since 2012. Prices were up 2.6 percent compared with March of 2020.

Economists broadly agree that some degree of inflation is to be expected in the next few months as the economy recovers from the worst recession since the Great Depression.

“We don’t see runaway inflation as an imminent risk,” said S&P Global U.S. chief economist Beth Ann Bovino.

“Actual inflation is nowhere near what markets are pricing in, and even with a near-term price lift, it won’t be enough to signal runaway inflation.”

But Republicans are warning that President Biden’s big-ticket spending — the $1.9 trillion American Rescue Plan followed by a $2.3 trillion infrastructure proposal — will further spur further inflation, putting a strain on consumers.

“We are testing the limits of how much money you can create and pump into the economy and expect prices to remain stable,” Sen. Pat Toomey (R-Pa.) said Tuesday in a Bloomberg News interview.

“I would argue that all the warning signs are blinking, at least yellow,” he said, pointing to increased prices in assets like stocks and virtual currencies, which he said could portend a market bubble.

Congressional Republicans are focusing on inflation in conversations about how to pay for Biden’s infrastructure package.

Republicans oppose Biden’s call to increase the corporate tax rate from 21 percent to 28 percent, which the White House says would fully cover the costs of his plan over 15 years.

They’re also not in favor of deficit spending, which carries further risks of adding to inflation.

Those two positions make Biden’s push for bipartisanship challenging if not impossible.

In a frank interview last week about what a bipartisan deal might look like, Biden confidant Sen. Chris Coons (D-Del.) said the $2.3 trillion price tag would likely come down but that some of it was likely to be financed through more debt.

“In the choice between raising taxes significantly and simply looking at each other and saying ‘We need a robust recovery,’ I think it’s more likely we’ll have a package that is not paid for and that is less robust but still putting hundreds of billions of dollars into infrastructure,” he said.

If inflation keeps rising, it would likely require an interest rate hike by the Federal Reserve that in turn could pop asset bubbles and deflate the recovery, potentially pushing the economy back into a recession.

Fed Chairman Jerome Powell, however, has insisted that the greater risk to the economy comes from too little fiscal action from Congress.

“Our best view is that the effect on inflation will be neither particularly large nor persistent,” he said last month.

On Monday, he specified that the Fed would “like to see it on track to move moderately above 2 percent for some time. When we get that, that’s when we’ll raise rates.”

David Berson, chief economist at Nationwide Insurance, said the March inflation numbers should not be cause for alarm.

“As the COVID recession hit last year, inflation went negative for several months. What that means is that even if inflation is really tepid, it’ll show as higher relative to last year,” he said.

Beyond comparisons to last year, the core inflation readings that exclude volatile food and energy prices remained relatively stable in March. The Labor Department reported that the 9.1 percent spike in gasoline prices accounted for nearly half of the overall Consumer Price Index increase.

Policymakers, Berson said, probably don’t need to worry unless core inflation remains at the current rate of 0.3 percent through the end of summer or into the fall.

But that seems unlikely despite the huge levels of stimulus. The conventional wisdom behind much of the economic handwringing around inflation, Berson said, has been upended by decades of economic data.

“There are a number of structural things worldwide that combine to keep inflation down,” he said.

One is the digitization of the economy, which has introduced intense price competition. Another is the productivity boost that technology has consistently brought to industry in recent years, lowering the cost of production and keeping consumer prices in check.

Perhaps most striking, however, is the effect of globalization. Increased production in low-cost countries around the world has created a disconnect between what’s happening in the U.S. economy and the places where many of its goods are produced, insulating them from price increases.

But the economic consensus, Berson noted, could be wrong, and signs of persistent inflation could take months or years to show up.