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Politics Price spike triggers new political debate on inflation

00:53  11 june  2021
00:53  11 june  2021 Source:   thehill.com

The Fed has abandoned price stability — Congress must correct its course

  The Fed has abandoned price stability — Congress must correct its course The Fed argues that our current “transitory inflation” is nothing to worry about as they keep open the monetary spigots. The Fed is ignoring its Congressionally mandated duties with little pushback. With Democrats counting on the Fed to monetize their bloated federal spending plans, there is no mechanism to enforce Fed accountability.

But Treasury yields fell as the hottest inflation report in decades failed to revive fears that the Federal Reserve will tighten policy sooner. The bond vigilantes – who were betting against the Federal Reserve view of transitory inflation – have be reining in their bearish bets on signs the Fed may not be as behind the curve as they had feared. There appears to be good reason to refrain from betting against the Fed's call on inflation . The economy is opening up, driving consumers back to areas that were shuttered during the pandemic such as restaurants and international travel, but this spike in prices

If food prices continue to grow at the rate recorded between Feb. 1 and April 20, they’d stage a 3.8% increase this year, according to calculations by economists at the University of Hohenheim based on online supermarkets. Shortening the time frame for the data implies an even bigger price spike . Philip Lane, the ECB’s chief economist, said in an online discussion on Wednesday that his staff has looked at changed spending patterns and their impact on inflation . “There are some forces raising the inflation rate, some forces lowering the inflation rate,” he said. “So in the overall scheme of things

New data showing a higher than expected May jump in inflation underscored how a bumpy recovery from the coronavirus recession poses political challenges for President Biden and the Federal Reserve.

a group of people walking on a city street: Price spike triggers new political debate on inflation © Getty Images Price spike triggers new political debate on inflation

The consumer price index (CPI) rose 5 percent in the year leading into May, the Labor Department reported Thursday, marking the fastest annual increase since August 2008 and slightly exceeding the expectations of economists. The CPI minus food and energy prices, which are more volatile, also rose 3.8 percent

The CPI, a closely watched gauge of inflation, was driven higher primarily by factors analysts expect to be temporary, such as a national used car shortage, a rush of diners back into restaurants, and demand for certain goods outpacing manufacturers' ability to supply them.

Biden administration seeks to thread needle on inflation

  Biden administration seeks to thread needle on inflation President Biden's top economic officials and the Federal Reserve are trying to sell the benefits of inflation while soothing concerns about the potential risks as the economy emerges from the coronavirus downturn.Before the COVID-19 pandemic, economists fretted for years over the tepid pace of wage increases and the persistently low inflation that helped suppress workers' salaries. But with the U.S. now seeing both prices and wages rise at much faster rates, policymakers are attempting to keep Americans patient with an economic recovery pushing inflation higher.For the Fed, the jump in prices is far from unexpected or even unwelcome.

“Markets are pricing in a Goldilocks scenario: low inflation and higher growth at trend,” said Pascal Blanque, chief investment officer at Amundi Asset Management, who recommends short duration and long value-stock trades. Dennis DeBusschere and his team at Evercore ISI see the recent moderation of market-derived inflation expectations as a tail wind to economic growth. As short bond positioning is cleared out, labor markets improve and China pushes back on commodity prices , the odds of a “significant move higher” in yields will rise again, according to the strategists.

Consumer prices jumped 5 percent in May from year earlier, faster than expected. Demand for cars is outpacing supply, an example of bottlenecks driving inflation .Credit Alyssa Schukar for The New York Times. Consumer prices rose at the fastest annual rate since 2008 in May, a bigger jump than economists had expected and one that is sure to keep inflation at the center of political and economic debate in Washington. The Consumer Price Index surged 5 percent in May from a year prior, the Labor Department said on Thursday.

For those reasons, most economists and investors saw little cause for alarm in the new data. The S&P 500 index set a new record shortly after the release of the report, and the bond market showed little concern about a potential emergency rate hike in the future.

"Demand has been much stronger than many anticipate and that demand has caused supply bottlenecks, which has put pressure on prices," said Joseph LaVorgna, chief economist of the Americas at investment firm Natixis who advised former President Trump's National Economic Council (NEC) in 2020.

"However, once the U.S. economy fully reopens and overseas economies more fully reopen, you're going to see these price pressures mitigate."

Biden and Fed Chair Jerome Powell may be able to take solace in hopes of a smoother future, but the short-term bumps still pose considerable political challenges for both the White House and central bank.

Inflation a growing problem for Democrats in 2022

  Inflation a growing problem for Democrats in 2022 Rising inflation is creating a drag on the Democrats’ 2022 prospects, threatening to send the price of household goods skyrocketing and turn voters against the party’s thin congressional majorities. © Provided by Washington Examiner Inflation increased significantly in May, pushing the cost of food and gasoline higher just as the United States digs itself out of the pandemic-induced recession of the last year.

The consumer price index serves as just one measure of price trends in the U.S. economy. However, it has taken on added significance as supply chain disruptions and shortages and surging demand during the recovery have begun to produce discernible price increases for consumers. " Inflation is heating up as the labor markets tighten up and with commodities and parts in short supply this inflation spike could persist for longer than Federal Reserve officials believe," Chris Rupkey, chief economist at FWDBONDS, wrote in an email.

US consumer prices spiked last month, with the inflation rate accelerating to five percent for the 12 months ending May as energy and used car prices rose, the government said Thursday. Stocks rose Thursday as traders digested a key print on inflation , which showed consumer prices rose faster than expected as demand surged during the recovery.

Republican lawmakers insisted Thursday that the new inflation data showed the peril of Biden's plans for trillions in further spending and Powell's commitment to keeping interest rates near zero percent through 2021 and beyond.

"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," said Sen. Pat Toomey (R-Penn.), ranking member on the Senate Banking Committee, in a Thursday tweet.

Biden and the Fed also took more heat from former Treasury Secretary Larry Summers, the chief Democratic critic of his agenda, who insisted that the May report underscored the danger of further stimulus for the fragile economy.

"The confidence with which inflation serene economists hold to their views, even after being repeatedly surprised, is a mystery to me," tweeted Summers, who also served as NEC director for former President Obama.

House GOP leader targets inflation hurt of Biden spending and taxes

  House GOP leader targets inflation hurt of Biden spending and taxes In a new move to reveal the inflationary costs to people of President Joe Biden’s liberal agenda, a House GOP leader is calling for a requirement that all spending and tax bills include an estimate of the economic punch they would deliver to low- and middle-income families. © Provided by Washington Examiner Indiana Rep. Jim Banks, the chairman of the Republican Study Committee, said that as inflation takes off under Biden, Congress should provide some sunshine on the potential that its actions will also increase consumer costs. Just this week, the administration reported that prices jumped a surprising 5%.

Yet the US consumer price index inflation data, due to be released at 8.30 a.m. ET on Thursday, has the potential to shake markets. Economists expect CPI to have jumped 4.7% year on year in May from 4.2% in April, which was the highest reading since 2008. Tech stocks, which have soared in an environment of low inflation and low interest rates, are particularly vulnerable. Markets should be able to digest a consensus rise in inflation , but will start to worry if the Fed begins to shift its position, Alan Ruskin, chief international strategist at Deutsche Bank, said.

As the debate over wearing face coverings in public gets increasingly political , critics point out that several areas have been lax with mask and distancing measures. The mask controversy — which took center stage in a debate over President Donald Trump’s weekend rally in Tulsa — is rooted in a perceived infringement on individual freedom, and disputed claims about face masks reducing the intake of oxygen. The company’s CEO explained he wanted to avoid the politically controversial topic of mask-wearing — a decision that sparked more debate .

"Reasonable people can disagree," he continued. "But I do not see how any responsible policy maker can fail to recognize that overheating is now the largest risk in the near term."

With months until inflation rates could move back toward historic averages, Biden and Powell are likely to battle concerns about rising prices throughout the summer.

That dynamic poses obstacles for both Biden and Powell at pivotal moments for each.

Biden has spent months in so-far fruitless negotiations with Republicans over a potential deal on infrastructure as Democratic lawmakers get increasingly impatient. But the president is also struggling to unite Democrats around a much larger package to pass through budget reconciliation with almost half of the year gone.

At the same time, a 2019 deal to waive the legal limit on the federal debt expires in less than two months. Republicans have already signaled they will refuse to support a debt ceiling hike without spending cuts, which could trigger a high-stakes budget battle as Biden attempts to cement trillions in infrastructure spending.

Biden spoke with prominent critic Larry Summers on economy after inflation warnings

  Biden spoke with prominent critic Larry Summers on economy after inflation warnings President Joe Biden called prominent Democratic economist Larry Summers to discuss the economy after he raised several warnings recently over his inflation concerns, a source familiar with the call confirms to CNN. © Rob Kim/Getty Images North America/Getty Images NEW YORK, NY - JANUARY 30: Former Treasury Secretary Larry Summers visits FOX Business Network at FOX Studios on January 30, 2015 in New York City.

"Today's 5 percent increase in the inflation rate is the highest since 2008 and makes one thing clear: President Joe Biden's partisan trillion-dollar spending sprees are raising prices on groceries and gas and everything in between," said Sen. Bill Haggerty (R-Tenn.) in a statement.

For Powell, the pressure comes amid his push to keep the Fed unified around its new framework, and financial markets patient with a turbulent economy. His performance could influence not only the Fed's credibility, but also whether Biden renominates him later this year with Powell's term set to expire in February.

Many economists said that while the near-term should be challenging for Biden and Powell, the May inflation numbers showed a range of temporary headaches that cause few long-term risks

Prices for used cars and trucks soared more than 7 percent between April and May, making up one-third of the total increase in the CPI. There has been intense demand for used cars in 2021 as rental companies rush to replace fleets they liquidated in 2020, but have struggled to find available autos.

Other items posting large price increases were recovering from crisis levels one year ago, including airfares, vehicle insurance, restaurant meals, and rents.

"We are entering what will no doubt be a long, hot summer as consumers continue to spend faster than most producers and service providers can keep up," wrote Diane Swonk, chief economist at Grant Thornton, in a Thursday analysis.

"The report reminds us of the transitory nature of price hikes and how consumers react."

LaVorgna said that the current state of price increase gave him little reason for concern, but warned that the dynamic could change drastically if Biden can push through the obstacles between him and another massive spending bill.

"If we do that, the Larry Summers school of thought, I think, is very, very legitimate. You will take a transitory inflation problem and potentially make it a permanent inflation problem," LaVorgna said.

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