Sunday 19th December 2021
Everything is getting more expensive in the US
Biden is resisting high inflation
Inflation is currently one of the most important political problems in the USA: President Biden is trying with all his might to break the price spiral – otherwise he sees next autumn’s elections in jeopardy. His opponents, on the other hand, enjoy the situation.
The roast for Christmas is more expensive, the price of many presents has risen, and gasoline also costs more than last year: Concerns about the high inflation rate are firmly under control in the USA before the holidays – and are causing great unrest in the White House . The economy is booming, the labor market has largely recovered from the Corona crisis, but the rate of inflation is getting out of hand. Many people blame the government for this. This is dangerous for President Joe Biden and his Democrats less than a year before the congressional elections: the more prices go up, the more Biden’s poll numbers go down.
For Biden, inflation is now the most pressing political problem, for his opponents it is a godsend. “Democratic policies have driven inflation for everyday goods to a staggering 40-year high,” said Kevin McCarthy, the top Republican in the House of Representatives, recently angry. “The prices of everything from gasoline to groceries are going through the roof.” Ex-President Donald Trump accuses Biden of having created an “inflation nation”. Senate Minority Leader Mitch McConnell said recently that despite all government promises, no improvement is in sight. “It’s getting worse,” he said.
The criticism could make sense to many voters, because they feel inflation themselves, their purchasing power is falling: If prices rise, they can afford less on the same income. That causes frustration. And many people have to tighten their belts. The US inflation rate was 6.8 percent in November year-over-year, the highest level in nearly four decades. The cost of food, for example, rose by 6.1 percent. Meat, fish and eggs were even almost 13 percent more expensive. The cost of living space rose by 3.8 percent. The development is most evident when refueling: The cost of gasoline in November was at times 58 percent higher than a year earlier, natural gas was around 25 percent more expensive.
Biden admits that inflation is putting pressure on families’ budgets. However, he emphasizes: “Every other aspect of the economy is booming”. The job market is recovering, wages are rising. Inflation is largely a consequence of the economic distortions resulting from the Corona crisis and problems with global supply chains. Other industrialized countries, including Germany, have the same problem, he stresses. In the USA, however, the inflation rate is even higher than in Europe.
Biden wants quick relief
Biden’s critics therefore also blame his government’s extensive economic and investment packages for inflation. The adoption of Biden’s next prestige project, a package for investments in climate protection and social issues, is pending. To get the project through the Senate, Biden needs the approval of all Democrats, including the more conservative Senator Joe Manchin. This has already pushed the scope of the package down, but the recently considered 1.75 trillion US dollars are still too much for him. The inflation is “alarming”, said Manchin recently. “It goes up, not down.”
Biden argues the proposed package will relieve the middle class and cut family spending by several thousand dollars a year. Adopting it will reduce cost pressures on families. For Biden, a lot depends on the package: He and the Democrats want to go into the election campaign next year. If many voters feel relief ahead of the November vote, they will be more likely to forgive Biden’s government for the inflation.
In the 2022 congressional election, the entire House of Representatives and around a third of the seats in the Senate will be re-elected. If current polls are correct, the Democrats could lose their slim majority in both chambers of parliament. If so, Biden is unlikely to get anything through Congress in the second half of his tenure – the Republicans could block his plans. Making Biden look bad and incapable of governing would certainly come in handy before the 2024 presidential election.
Fed needs to stimulate the economy
The darn thing about persistently soaring prices is that they could lead to higher and higher inflation: when everything gets more expensive, owners ask for higher rent, workers want higher salaries, and companies raise prices to make up for higher costs. What economists call a price spiral is looming: a reciprocal surge in prices that drives inflation. The powerful US president and commander in chief of the armed forces has little leverage to curb inflation. The government has launched initiatives to reduce price pressures, but they are limited in scope.
In Washington, powerful ammunition to fight inflation is not to be found in the White House, but at the headquarters of the US Federal Reserve (Fed). The central bank decides on the level of the key interest rate and can thus have a strong influence on economic development and inflation. During the Corona crisis, the central bank eased its monetary policy massively in order to support the economy and financial markets. The Fed has now turned around in the face of robust growth and high inflation.
An important aid program is due to expire in March, after which there will be the first increases in the key interest rate. That would dampen inflation, but it would also slow down economic growth. If the Fed intervenes too hard, the economy could collapse in the second half of the year – just before the congressional election, which Biden wants to win.