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Joe Biden is extremely confused about inflation. Not a joke, as the not-funny president so frequently (and oddly) says.
At a recent CNN Town Hall, President Biden once again dismissed rising prices as a temporary hiccup in his otherwise brilliant recovery plan, regurgitating the notion that the surge is temporary, and not a threat to the economy.
More astonishing, he again claimed that Democrats’ proposals to spend trillions more in new entitlements and grandiose payoffs to special interest groups like the teachers unions will actually bring prices down.
His claims, he said, are backed up by all “serious” economists.
How can we possibly challenge all of that? With conviction.
Let’s start with the notion that no serious practitioners are concerned about inflation. Earlier this month, Kristalina Georgieva, the head of the International Monetary Fund, posted this on that institution’s blog: “While further fiscal support in some major advanced economies, including the United States, would benefit growth more broadly, it could also further fuel inflationary pressures.”
By “further fiscal support” she meant Democrats’ reckless $3.5 trillion spend-a-thon that they threaten to pass with zero Republican votes.
Georgieva is joined by St. Louis Fed President James Bullard, who has warned repeatedly that inflation could prove more durable than expected. He’s a pretty serious guy, too.
In the town hall, Biden singled out one of the most vocal critics of Democrats’ big spending plans, saying “I don’t know anybody – including Larry Summers, who’s a friend of mine, who’s worried about inflation – is suggesting that there’s any long-term march here if we do the things we’re going to do.”
Summers, former Treasury secretary, has repeatedly warned that “overheating, and not excessive slack, is the predominant near-term risk for the economy”; the jump in prices last month – the biggest in 13 years, has only strengthened his convictions.
In fact, there are a lot of folks worried that the recent pop in prices might be more than a temporary blip. Countering their arguments, Biden, like others, has pointed to some commodities that posted huge price jumps earlier this year but that now have tapered off.
For instance, lumber prices soared to a record $1,700 per thousand board feet in May, and have tumbled some 60% since. But the most recent price is still 83% above the level two years ago, before the pandemic hit.
A broader signal is sent by the CRB Commodities Index, which tracks global commodities; it is up 26% since the beginning of the year and at its highest level in five years.
Uncle Joe promised during the town hall that if Congress passes the bipartisan $1.2 trillion infrastructure bill and Democrats’ $3.5 trillion wish-list mess of a bill, “We will, in fact, reduce inflation. Reduce inflation. Reduce inflation…”
Like Dorothy in the Wizard of Oz, Biden seems to think repeating something three times will magically make it happen. If only he could click his heels.
He proposed that the spending will provide “good opportunities and jobs for people who, in fact, are going to be reinvesting that money back in all the things we’re talking about, driving down prices, not raising prices.” Who knows what that means.
Maybe Biden means that infrastructure investments will in time produce higher productivity, which would indeed help curb inflation. But since in our red tape-laden country building a bridge can take a decade, it is unlikely that investing in those kinds of projects will help out families any time soon.
In his recent six-month victory lap, Biden assured voters that, “The data shows that most of the price increases we’ve seen are – were expected and expected to be temporary.”
That is pure malarkey. A year ago the Federal Reserve, which is charged with controlling inflation, estimated that PCE inflation (their preferred measure) would be 1.6% this year; their most recent forecast is 3.4% – almost double.
Certainly the past year has been full of surprises, and we have to cut the Fed some slack. But it is noteworthy that, even 12 months ago, while they expected our economy would grow at 5% this year – more than twice the long-term rate – they did not foresee much inflationary impact.
Now the Fed is projecting that inflation next year will drop to around 2%; what could go wrong?
First, we have a shortage of workers, which is pushing wages higher. The NFIB, an association of small business owners, reported recently that nearly half their members are unable to fill job openings, more than twice the historical average.
Not surprisingly, a record number of small businesses are raising wages. To cover their costs, almost half are also raising prices, the highest number since the start of 1981. That is how inflation takes root.
Second, the rate of growth in the economy may be tapering slightly, but it will be sustained at a high level by the extreme shortage of goods available. Inventories are at their lowest-ever level relative to sales; businesses will continue scrambling to stock empty shelves.
Third, home prices are soaring; last month the median U.S. home price rose 23.4% from a year earlier. Though the cost of a house is not included in inflation calculations, there is a spillover effect in the imputed cost of housing, which comprises 30% to 40% of the indices.
Fourth, the Fed continues to ignore the powerful impact of consumer net worth, which has increased by tens of trillions of dollars over the past year, thanks to rising stock and home prices, and which leads growth by about two quarters.
A key Democrat pollster is warning Joe Biden and his colleagues that consumers will not applaud their big spending plans if prices continue to rise. People paying more for cars, groceries and housing will connect the dots between their higher bills and the trillions being shoveled out by the government…even if Biden does not. And they will punish Democrats in the midterms.
Not a joke.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.