Biden administration officials are insisting that the recent inflation spike will be temporary, but political challenges are already emerging from the historically high price levels that have yet to show any signs of receding.
Inflationary speed bumps are hitting the economy as it recovers from the coronavirus pandemic, causing anxiety in the business community and prompting Republicans to reposition themselves as the fiscally responsible party heading into a debt ceiling fight.
Federal Reserve officials say they’re now expecting inflation to rise 3.4 percent in 2021, compared with 2.4 percent just two months ago. They also raised their economic growth forecast for the year to 7 percent, from 6.5 percent in March.
A White House official told The Hill that the updated figures reaffirm that President Biden’s economic plan is working.
“That’s the story of President Biden’s presidency after just five months in office: economic growth is up, unemployment is down, and America is roaring back thanks to the President’s leadership,” the official said.
But GOP lawmakers argue that both government spending and inflation are spiraling out of control.
Republican Study Committee Chairman Jim Banks (R-Ind.) this week sent a memo to members of the largest GOP caucus on Capitol Hill outlining demands heading into a fight over raising the debt limit.
“Given the worsening fiscal outlook for the federal government and at least 3 ½ more years of President Biden proposing trillions and trillions of dollars of deficit-financed spending, it is more important than ever for conservatives to reclaim the debt limit as a tool to highlight and force action on our nation’s spending problem,” Banks wrote.
A two-year deal reached in 2019 to suspend the legal limit on how much debt the federal government can owe is set to expire on Aug. 1. Failure to reach an agreement on the debt ceiling could lead to the U.S. government defaulting on its debt, a move that would likely trigger chaos in the global financial system.
For that reason, Republican lawmakers are planning to use the upcoming deadline to extract spending cuts. Several GOP senators warned Treasury Secretary Janet Yellen in hearings this week that the White House must rein in its spending plans, citing inflation as a concern.
“If inflation expectations become unanchored, which no one can credibly claim cannot happen, the resulting increased interest rates can turn federal debt service costs into budget busters,” Sen. Mike Crapo (R-Idaho) told Yellen at a Senate Finance Committee hearing Wednesday.
Yellen and the broader Biden economic team have expressed confidence that inflation will eventually cool down, and Fed officials, like most economists, expect annual inflation to settle down as pandemic-related constraints ease.
Still, that’s not making it any easier to sell the president’s infrastructure proposal and budget request for 2022.
The U.S. Chamber of Commerce, the biggest pro-business lobbying group in the U.S., argues that the possibility of inflation running longer than expected is more likely if Democrats plow ahead with plans to spend trillions more this year.
“For the most part, the administration can’t do a lot about inflation. But what they can do is not make it worse by having huge spending bills,” said Curtis Dubay, senior economist at the Chamber. “The administration has a case to say, ‘This is not anything about what we’ve done,’ if they do not make things worse in the meantime.”
In a Thursday blog post, White House economists Susan Helper and Evan Soltas laid out how the rush toward reopening has strained suppliers and industries that were largely idle during the depths of the pandemic.
“While a fast pivot to growth is good news for businesses and workers, it also creates challenges. Entire industries that shrank dramatically during the pandemic, such as the hotel and restaurant sectors, are now trying to reopen,” they wrote.
“These shortages and supply-chain disruptions are significant and widespread—but are likely to be transitory,” they continued. “While markets will eventually adjust, they can be slow and the impact on producers and consumers can be costly.”
The Business Roundtable, the top CEO trade group, shared the Chamber’s fears that inflation could go on longer than the White House expects.
“The hope of the Fed is that this is transitory. The question is, how long is transitory? Is it six months? Is it 12 months? Or have we gotten into what would unfortunately be an inflationary cycle where wage growth follows wage growth follows wage growth, which means it’s not transitory,” said Gregory Hayes, CEO of Raytheon and head of the Business Roundtable’s Tax & Fiscal Policy Committee.
The White House is steadfast in its belief that inflation concerns will be resolved in a matter of months.
“I think the success of our vaccination campaign surprised many people, and so they weren’t prepared for demand to rebound in this way. But we still expect this to be transitory in nature,” Deputy Director of the National Economic Council Sameera Fazili told reporters earlier this month. “We’re going to keep an eye on it, but we think it should resolve in the next few months.”
That projection is “very rosy” from the Chamber’s perspective.
“You have workforce issues playing into supply chain issues. While some things subside, other things will pop up,” Dubay said. “It’s going to take until 2022 until we get back to normal or new normal—some things are going to change.”