Concerns are mounting that Joe Biden‘s $6 trillion spending spree will cause inflation, which is already at a 13-year high, to surge even further amid record federal spending and deficit – as Republicans warn his ‘green worker paradise’ plan will only supercharge prices.
The consumer price index rose 5 percent in the 12 months through May, which is the highest year-on-year increase since August 2008, according to the government’s latest report.
Experts, including Deutsche Bank, warned that the effects of rising prices could be ‘devastating’ and that huge deficit spending by Congress could supercharge inflation rates.
Biden’s $6 trillion budget plan has already sparked major inflation fears given it is set to boost federal spending by 25 percent, which is the highest since World War II.
According to a monthly report from the Treasury Department, the government has already set records for spending and deficit in the first eight months of the fiscal year.
Federal spending climbed to $4.67 billion, which resulted in a deficit of $2 billion, the report says.
The consumer price index rose 5 percent in the 12 months through May, which is the highest year-on-year increase since August 2008, according to the government’s latest report
According to a monthly report from the Treasury Department, the government has already set records for spending and deficit in the first eight months of the fiscal year. Federal spending climbed to $4.67 billion, which resulted in a deficit of $2 billion
Republicans blame the sharp rise in inflation on lax monetary policy and freewheeling stimulus spending by the Biden administration.
Larry Kudlow, who was the Trump administration’s Director of the National Economic Council, warned on Thursday that high inflation could be permanent if Biden’s plans are passed.
‘If Uncle Joe Biden gets his green worker paradise, Soviet-style Bulgarian economic policies, massive tax increases, massive social spending, destroying the fossil fuel energy sector, then the dollar will collapse and leaping tax rates will choke off economic growth,’ Kudlow said on his Fox News program.
Joe Biden’s $6 trillion budget plan has already sparked major inflation fears given it is set to boost federal spending by 25 percent, which is the highest since World War II
‘Call it the 1970s with a socialist spin. In that case, we will have permanently higher inflation. And we will have weaker and weaker economy.
‘Now if, on the other hand, Mr Biden’s green worker paradise does not get voted in, then I’m going to say this inflation bump is just going to be temporary. A couple more months that’s all. Really a rebound from the pandemic deflation, and actually, it’s a sign of strong economic growth. There will be no long-term inflation consequences. That’s if we don’t get the Bulgarian model.’
Biden administration officials have said they expect consumer prices to peak this summer and then begin to dissipate in the fall.
An official told Reuters that the 5 percent accelerated CPI was largely due to a ‘base effect’ given the low level of prices seen in the early phase of the COVID-19 pandemic.
The Biden administration is remained convinced that the current spike in consumer prices will be transitory.
‘It’s most likely that it’s going to peak in the next few months. We’ll probably see the worst of it this summer, and (then) in the fall, things will probably start to get back to normal,’ the official said.
The official rejected concerns voiced by Republican lawmakers that President Joe Biden’s proposed boost in spending on infrastructure, child care and community college would put further pressure on prices, given that the spending would only kick in around 2023 and then spread out over a decade.
‘This is not piling stimulus upon stimulus,’ the official said. ‘This is addressing a long-term problem over a longer duration. This is a decade-long plan to fix 40-year problems.’
Larry Kudlow, who was the Trump administration’s Director of the National Economic Council, warned on Thursday that high inflation could be permanent if Biden’s plans are passed
Inflation saps the value of your dollar: This is how it works
Have you ever been shopping and noticed that the prices of things you typically buy have gone up? If the items in your shopping basket cost $100 last year and now they cost $105, at a very basic level, that’s inflation.
Prices are changing all the time but we don’t say there is inflation every time we see a price increase.
Instead, we say there is inflation when the prices of many of the things we buy rise at the same time and then continue to rise.
So how can we tell when inflation is happening and by how much? We do so by looking at the prices of many items over time.
Government statistical agencies regularly gather information about the prices of thousands of goods and services.
They then organize the prices into categories such as ‘transportation’ and ‘apparel,’ they combine the prices in each category, and they report the results in various price indexes.
Price indexes are just collections of prices.
For example, some indexes contain the prices of items that consumers buy, and others contain the prices of items that businesses buy.
Others contain prices only for goods, while others contain prices only for services, and so on.
If the level of an index is higher now than it was a month or year ago, it tells us that the prices contained in that index are higher on average, which tells us there is inflation.
Source: Federal Reserve Bank of Cleveland
Deutsche Bank, however, issued a stark warning on inflation amid news of the 5 percent rate.
‘Rising prices will touch everyone. The effects could be devastating, particularly for the most vulnerable in society,’ a report from the bank said this week.
‘Few still remember how our societies and economies were threatened by high inflation 50 years ago. The most basic laws of economics, the ones that have stood the test of time over a millennium, have not been suspended.’
The report expressed concerns that huge deficit spending by Congress as well as the Federal Reserve’s loose monetary policy could supercharge inflation rates.
‘The current fiscal stimulus is more comparable with that seen around WWII’ when deficits ran 15 to 30 percent of GDP for four years, the report said.
‘While there are many significant differences between the pandemic and WWII we would note that annual inflation was 8.4%, 14.6% and 7.7% in 1946, 1947 and 1948 after the economy normalized and pent-up demand was released.’
‘Monetary stimulus has been equally breath-taking,’ the report added of the Federal Reserve, which has flooded the economy with money through bond purchases.
‘In numerical terms, the Fed’s balance sheet has almost doubled during the pandemic to nearly $8 trillion. That compares with the 2008 crisis when it only increased by a little more than $1 trillion, and then increased another $2 trillion in the subsequent six years.’
‘We worry that inflation will make a comeback… An explosive growth in debt financed largely by central banks is likely to lead to higher inflation.’
Republicans lawmakers are calling it ‘Biden’s inflation crisis’.
‘President Biden’s inflation crisis is here and it’s devastating for our poorest families,’ Senator Rick Scott, a Florida Republican, said in response to the new data.
‘It’s time to end the madness. It’s clear we cannot rely on Joe Biden and the Democrats to stand up and protect American families,’ said Scott, who is pushing a bill to slash government spending and rein in federal debt.
‘Inflation is up 5% – and Biden wants to spend $6 trillion more to see how high it will go,’ Senator Tom Cotton, an Arkansas Republican, tweeted.
Though the new inflation measure exceeded economists’ forecasts, Fed Chair Jerome Powell has repeatedly insisted that higher inflation will be transitory, and it was unclear whether the new data would prompt a reassessment of monetary policy to meet its 2 percent average inflation goal.
The U.S. central bank slashed its benchmark overnight interest rate to near zero last year and continues to flood the economy with money through monthly bond purchases.
The 12-month price change of all items in selected categories is seen in the chart above. Inflation rose at a faster annual rate in May than any time since the Great Recession
Average prices for eggs (dark blue), milk (red) and ground beef (light blue) are seen over the past 20 years in the chart above
The 12-month inflation rate for food (blue), shelter (purple) and clothing (gold) is seen in the chart above
Senator Pat Toomey, a Republican from Pennsylvania and economy-focused moderate, argued that the Fed needs to immediately adjust course and raise interest rates before inflation spirals out of control.
‘With consumer prices up 5% over the last year, and core prices (excluding volatile food and energy) up 3.8%—a 29-year high!—we should all be very concerned. It’s long overdue for the Fed to begin the process of normalizing its monetary policy,’ Toomey tweeted.
‘The combination of the Fed’s average inflation targeting and its view that inflation will be transitory virtually guarantees the Fed will be behind the curve if inflation is enduring. Congress’ massive spending contributes to the problem. It’s time to end it,’ he added.
Senator Bill Hagerty, a Tennessee Republican who sits on the Banking Committee, called the spike in inflation ‘a clear and immediate tax on the middle class.’
‘President Joe Biden’s partisan trillion-dollar spending sprees are raising prices on groceries and gas and everything in between,’ he said in a statement. ‘Unless our supply chains normalize quickly to meet pent-up demand from the pandemic, this tax hike on the American people will continue and could go even higher.’
Some Republicans, including Scott, raised the specter of a return to the inflation rates of the 1970s, when annual inflation jumped as high as 13.5 percent as food and gas prices soared.
Democrats, meanwhile, remained largely silent on the new inflation data, or insisted that it was a transitory effect driven largely by such factors as a shortage of used cars, saying it will quickly disappear.
People walk through a shopping area in Manhattan on Monday. The reopening surge is driving prices higher for consumers
The Fed views a controlled amount of inflation as good, because it encourages spending and business investment, rather than hoarding cash.
But out-of-control inflation can be dangerous, eroding the spending power of consumers and hitting low-income families and elderly pensioners the hardest.
Other factors driving inflation include rising consumer demand post-pandemic that is bumping up against a shortage of components, from lumber and steel to chemicals and semiconductors, that supply such key products as autos and computer equipment, all of which has forced up prices.
The sharp rise in consumer prices reflected a range of goods and services now in growing demand as people increasingly shop, travel, dine out and attend entertainment events in a rapidly reopening economy.
And as consumers increasingly venture away from home, demand has spread from manufactured goods to services – airline fares, for example, along with restaurant meals and hotel prices – raising inflation in those areas, too.
A labor shortage has also contributed to rising prices, as companies continue to offer high wages and incentives to lure reluctant workers back into the job market.
More than 15.3 million Americans are still on some form of unemployment benefit, data on Thursday showed, yet employers are struggling to attract qualified workers back into jobs, and about eight million fewer people are working than before the pandemic began.
From breakfast cereal to toilet paper: These are the companies raising prices on everyday consumer staples
From the cereal maker General Mills to Chipotle Mexican Grill to the paint maker Sherwin-Williams, a range of companies have been raising prices or plan to do so, in some cases to make up for higher wages that they’re now paying to keep or attract workers.
‘The inflation pressure we’re seeing is significant,’ General Mills CEO Jeff Harmening said at a recent investor conference. ‘It’s probably higher than we’ve seen in the last decade.’
The company, which makes such cereals as Honey Nut Cheerios, Lucky Charms, and Trix, has said it’s considering raising prices on its products because grain, sugar and other ingredients have become costlier.
Hormel Foods has already increased prices for Skippy peanut butter. Coca-Cola has said it expects to raise prices to offset higher costs.
Shoppers are seen at a Vermont Costco last month. The sharp rise in consumer prices reflected a range of goods and services now in growing demand
People walk through a shopping area in Manhattan on Monday. The reopening surge is driving prices higher for consumers
Kimberly-Clark, which makes Kleenex and Scott toilet paper, said it will be raising prices on about 60 percent of its products. Proctor & Gamble has said it will raise prices for its baby, feminine and adult care products.
Restaurants have also been jacking up prices as they race to raise wages and lure potential employees back into the workforce.
This week, Chipotle Mexican Grill announced it was boosting menu prices by roughly 4 percent to cover the cost of raising its workers´ wages.
In May, Chipotle had said that it would raise hourly wages for its restaurant workers to reach an average of $15 an hour by the end of June.
Inflation in restaurant prices is far outpacing food on the grocery store shelves, perhaps reflecting the added labor costs.
Last month, restaurant prices jumped 4 percent on an annual basis, compared to 2.2 percent for groceries, Thursday’s data showed.
‘There is stronger demand for hotel rooms, air travel, restaurant dining,’ said Gus Faucher, chief economist at PNC Financial. ‘Many businesses are also facing upward pressure on their costs such as higher wages.’
Gregory Daco, chief U.S. economist at Oxford Economics, noted that in some cases, a jump in the price of goods such as autos is raising the price of car rental services.
New car prices were up 3.3 percent on the year in May, while used car prices jumped a staggering 30 percent.
Energy prices, including fuel and electricity, were the biggest inflation driver, soaring 29 percent from 12 months ago.
Gasoline, impacted in part by the ransomware hack of the Colonial Pipeline, rose 56 percent in May from a year ago.
On Thursday, the AAA Gas Price Index pegged the national average gas price at $3.073, up from $2.071 one year ago.
With roughly 70 percent of all goods in the U.S. delivered by truck, the soaring gas prices had the potential to drive up consumer prices even further.
‘It is going to be a muggy summer on the inflation front,’ Daco said. ‘There will be a pass-through from higher goods prices to higher prices for services.’