Inflation becomes Joe Biden’s biggest election year problem

As announced on Wednesday, consumer prices rose seven percent year-on-year in December. This means that inflation in the US is higher than it has been in almost 40 years and is well above the Federal Reserve’s target, which is aiming for an annual rate of two percent. Energy prices are skyrocketing: they were most recently 30 percent above the previous year. The cost of food rose 6.3 percent.

Americans no longer only have to pay at the gas station, in the supermarket and when buying a car, in many places they are also confronted with a shortage of goods. Snowstorms on the US coast recently paralyzed supply chains, and images of empty shelves wander through social media.

In the year of the important mid-term elections, such developments are political poison for Biden and his Democrats. According to a CNN poll, only 44 percent of US citizens trust Biden to have the economy under control. That is the lowest value for a US president since the 1970s.

On November 8, when the Democrats have to defend their majorities in both chambers of Congress, the party faces disaster. “Americans don’t like to pay extra, they’ll let politicians know that,” says an analysis by Morning Consult.

According to the International Monetary Fund and US Treasury Secretary Janet Yellen, inflation will remain at a high level until at least the middle of next year. It is likely to become one of the most important election campaign issues, that is already becoming apparent. The US Republicans are placing high prices at the center of their attacks, representing Biden’s economic record.

US Republicans: “Americans Pay the Price for Biden’s Failure”

“Under Joe Biden everything costs more, the shelves are empty, and small businesses have to close or find no employees,” said Republican boss Ronna McDaniel. “The Americans pay the price for Biden’s failure, and Biden doesn’t care.” In a conversation with journalists, the party leader became even clearer: “We won’t talk about anything else in the election campaign than that: Biden is destroying our country.”

The subject has long since found its way into the struggle for congressional mandates. Former North Carolina Republican football player Bo Hines tweeted after the latest inflation figures: “The idea that a new president would end Covid was wrong. Instead, we now have an immigration crisis, an inflationary crisis, a spike in gasoline prices, and empty shelves. I’m taking Donald Trump back. ”

Attacks like these could easily get caught up in the election campaign, polls show. The priorities of Americans are shifting, a survey by the AP news agency found. If the pandemic was the main concern of people just a few months ago, it is now the state of the economy. Inflation in particular was cited as the main problem by 14 percent – a year ago, less than one percent of people worried about it.

What the central bank does – and why its influence is limited

The US government’s hope now rests on the Fed. The chairman of the US Federal Reserve, Jerome Powell, had stressed in a two and a half hour hearing before the US Congress on Tuesday that he wanted to fight the rising prices with all means. This should happen in three ways.

On the one hand, the Fed is in the process of scaling back its bond purchases, which it launched at the beginning of the pandemic in order to prop up the markets. Interest rates could turn around in March. At their most recent meeting in December, the monetary politicians signaled three increases of 0.25 percentage points each. Goldman Sachs economists expect four interest rate hikes. Jamie Dimon, CEO of major bank JP Morgan Chase, believes it could be even more.

On the other hand, the central bank’s total assets are also to be reduced, which have grown to almost nine trillion dollars. “It’s a lot bigger than it needs to be,” Powell clarified on Tuesday. He was nominated for a second term by US President Biden; the Senate has yet to vote on it. “I am confident that we can achieve price stability,” said Powell. This is important because the economy can grow the most with stable prices and thus the labor market would also benefit the most.

“Prices are running hot and we are now in a phase where the Fed is also seriously concerned that inflation is becoming more and more entrenched,” said Diane Swonk, Chief Economist at Grant Thornton. The Fed is “in panic mode. This increases the risk that it will raise interest rates too much. ”She no longer anticipates developments, but runs after them, said Swonk on the US stock exchange broadcaster CNBC. “That is worrying.”

The chief economic advisor to Allianz, Mohamed El-Erian, warned of the complex consequences of a wave of inflation. “Inflation is not just a number that needs to be managed by a central bank. It affects economic, social and political outcomes, ”he said on Wednesday. “If inflation is too high, as it is today, it creates financial uncertainty among those who are most vulnerable – both immediately and in the longer term.”

In fact, people with lower incomes are particularly hard hit by inflation. You cannot compensate for higher prices with clever investments, but notice them daily in everyday life. Drivers are particularly affected: gasoline prices have risen by almost 50 percent, and anyone who wants to buy a used car has to spend 37 percent more.

Biden accuses corporations of artificially increasing prices

It has not yet been said that the Fed can get inflation under control so easily. The central bank has little influence on oil prices or supply chain problems. Washington’s room for maneuver is also limited. Recent measures, such as a supply chain task force, are only slowly having an impact. And it will also take some time before the money from the 1.2 trillion infrastructure package arrives where it is needed – at the ports, on the roads, in transport.

The president now wants to take action against cartels in the consumer market. The US government is accusing meat producers of exaggerating prices during the pandemic in order to artificially increase profit margins. A similar investigation is ongoing against US oil companies related to higher gasoline prices.

The new chairman of the powerful US Chamber of Commerce, Suzanne Clark, thinks of things that Biden shouldn’t be doing. She calls on the government to distribute less money so as not to further fuel the price spiral. The US Congress had decided under Biden a 1.9 trillion Covid emergency aid package and distributed economic checks to the population.

Even under Trump, almost five trillion dollars of government aid was granted after the outbreak of the pandemic and a lightning recession in spring 2020. “The government can do many things that would make the situation worse,” said Clark. “But there are also things that it can do, and that is mainly about the shortage of workers.” Help with childcare and doubling legal immigration, for example, could help ease the pressure on wages.

There should be no new government spending for now: Biden’s “Build Back Better” reform package, which provides for two trillion dollars for climate protection and social issues, is on hold – one reason for this is concerns about additional inflation.

According to Douglas Holtz-Eakin, former chief economist at George W. Bush, Biden can only hope for an improvement in the situation by the summer: “At some point in June or July, most people make a decision about who to vote for. Then the performance of the economy counts at this moment. ”

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