Spiking inflation weighs on Biden economic agenda

A surprising June spike in inflation has created another obstacle for President Biden ahead of a critical push for his economic agenda.

Biden and congressional Democrats are taking steps toward passing both a bipartisan infrastructure deal and a much larger party-line bill before the end of August, all while needing to raise the federal debt limit.

But new data shows there was an unexpected surge in consumer prices, putting the White House on the defensive after weeks of rallying support for Biden’s spending plans.

The Labor Department reported Tuesday that the consumer price index (CPI), a key gauge of inflation, rose 0.9 percent in June and 5.4 percent in the 12 months leading into last month — each the highest rate since 2008. While consumer prices were widely expected to keep rising, inflation spiked far faster than the consensus 0.5 percent increase projected by economists.

“If you look at inflation and the first six months of this year, it’s as bad as it was in the last six months of 1981,” said Senate Minority Leader Mitch McConnell (R-Ky.) told reporters at the Capitol.

“Everybody’s talking about it — in grocery stores, in manufacturing businesses, nursing homes — everybody’s experiencing inflation.”

Despite June’s sharp price increases, most economists still believe inflation will fall off later in the year as a wide range of short-term factors dissipate. Most of the June increase in the CPI came from goods in short supply or high demand — such as used cars, hotel rooms and flights — that were cast aside during pandemic lockdowns.

“The headline number and certainly the core number was shocking. But when you started to look at it, what you saw was just an exaggerated version of what’s been going on the last several months,” said Daniel Alpert, managing partner of investment firm Westwood Capital.

“You have these supply-side bottlenecks that are clear and you have a surge in demand caused by, to some extent, the residual savings built up, as well as the continued government support or household incomes and the freedom that people suddenly have to move around the globe.”

Even so, it could be months until prices begin to cool off and supply chains are back to normal, posing serious obstacles to Biden’s spending plans and leaving him vulnerable to GOP attacks.

Republicans have frequently invoked former President Carter, whose handling of a serious inflation crisis derailed his presidency, while making their case to take back the House and Senate majorities in 2022. Republicans have argued that rising food, gas and housing prices will spiral higher if Biden cements trillions more in spending.

“Yet Biden and the Democrats still want to spend trillions of dollars more, even under these economic conditions — it’s Jimmy Carter 2.0. It has to end,” said Sen. Bill Hagerty (R-Tenn.) in a Tuesday statement.

Economists counter that there are major economic differences between the stagflation of the late 1970s and the current economic environment.

While inflation spiked in the ’70s, prices now are rising after falling sharply during the onset of the coronavirus pandemic. Supply chain disruptions created by COVID-19 and a global shortage of semiconductors are also restricting the availability of some high-demand goods.

Scarcity in other parts of the economy is also contributing to the overall surge in consumer prices. For example, the price index for used cars and trucks skyrocketed by 10.5 percent last month, making up more than one-third of June’s total increase in inflation.

Used autos have been scarce throughout the pandemic as manufacturing delays and a sharp drop in repossessions kept more cars and trucks out of the resale market. Those available are often purchased quickly at high prices by rental car companies, which liquidated their fleets during the onset of the pandemic and have struggled to replace them.

“It’s possible that the global semiconductor shortage extends into next year, but it would be surprising if used-car prices continue to rise by double digits,” wrote Ryan Sweet, an economist at Moody’s Analytics, in a Tuesday research note.

“This will not worry the Fed unless it continues to drive long-term inflation expectations to a point that markets are betting that the transitory acceleration in inflation is more persistent.”

Stocks dipped slightly Tuesday on the inflation news, but yields on U.S. Treasury bonds — which often rise with inflation fears — moved little after the CPI report. The yield on the 10-year Treasury bond was at 1.4 percent Tuesday afternoon after spiking as high as 1.7 percent earlier in the year.

While Wall Street showed little concern over the inflation spike, rising prices are expected to be a central focus of Federal Reserve Chairman Jerome Powell’s back-to-back appearances Wednesday before the House Financial Services Committee and Thursday before the Senate Banking Committee.

Powell and top Biden administration economic officials have expressed confidence that inflation will ease deeper into the year. Powell has also insisted that the Fed is well-equipped to handle a persistent overshoot of its inflation goal and was in no danger of ’70s-style inflation spirals.

“The timing of that is pretty uncertain and so are the effects in the near term, but over time it seems likely that these very specific things that are driving up inflation will be temporary,” Powell said during a press conference last month.

Powell, a Republican is among three Trump-appointed Fed officials approaching the end of his term, and it is unclear if Biden will renominate him. Even so, he remains popular among both Democrats and Republicans, who’ve largely avoided criticizing him directly for rising inflation.

While Powell’s political fortunes may be unharmed by rising inflation, Biden and White House economists wasted little time shoring up a defense of their agenda with Republicans eager to attack.

“Headline inflation is up but we need to look under the hood to understand what’s really going on,” said Heather Boushey, a member of the White House Council of Economic Advisors.

She added that without “cars and pandemic-related services, June’s monthly inflation was 0.2 percent.”