US President Joe Biden Photograph:( AFP )
Traditional readings of price increases are beginning to turn upward as the recovery accelerates
Even before President Joe Biden took office, some of his closest aides were focused on a question that risked derailing his economic agenda: Would his plans for a $1.9 trillion economic rescue package and additional government spending overheat the economy and fuel runaway inflation?
To find the answer, a close circle of advisers now working at the White House and the Treasury Department projected the behaviors of shoppers, employers, stock traders and others if Biden’s plans succeeded. Officials as senior as Janet Yellen, the Treasury secretary, pored over the analyses in video calls and in-person meetings, looking for any hint that Biden’s plans could generate sustained price increases that could hamstring family budgets. It never appeared.
Those efforts convinced Biden’s team that there is little risk of inflation spiraling out of the Federal Reserve’s control — an outcome that Wall Street analysts, a few prominent Republicans and even liberal economists like former Treasury Secretary Lawrence Summers have said could flow from the trillions being pumped into the economy.
Traditional readings of price increases are beginning to turn upward as the recovery accelerates. On Tuesday, the Consumer Price Index rose 0.6%, its fastest monthly increase in more than a decade, while a less volatile index excluding food and energy rose a more muted 0.3%.
But Biden’s advisers believe any price spike is likely to be temporary and not harmful, essentially a one-time event stemming from the unique nature of a pandemic recession that ruptured supply chains and continues to depress activity in key economic sectors like restaurant dining and tourism.
The administration’s view mirrors the posture of top officials at the Fed, including its chairman, Jerome Powell, whose mandate includes maintaining price stability in the economy. Powell has said that the Fed expects any short-term price pops to be temporary, not sustained, and not the type of uptick that would prompt the central bank to raise interest rates rapidly — or anytime soon.
“What we see is relatively modest increases in inflation,” Powell said in March. “But those are not permanent things.”
Armed with their internal data and conclusions, administration officials have begun to push back on warnings that a stimulus-fueled surge in consumer spending could revive a 1970s-style escalation in wages and prices that could cripple the economy in the years to come.
Yet they remain wary of the inflation threat and have devised the next wave of Biden’s spending plans, a $2.3 trillion infrastructure package, to dispense money gradually enough not to stoke further price increases right away. Administration officials also continue to check on real-time measures of prices across the economy, multiple times a day.
“We think the likeliest outlook over the next several months is for inflation to rise modestly,” two officials at Biden’s Council of Economic Advisers, Jared Bernstein and Ernie Tedeschi, wrote Monday in a blog post outlining some of the administration’s thinking. “We will, however, carefully monitor both actual price changes and inflation expectations for any signs of unexpected price pressures that might arise as America leaves the pandemic behind and enters the next economic expansion.”
Some Republicans call that posture dangerous. Sen. Rick Scott of Florida, chairman of his party’s campaign arm for the 2022 midterm elections, has called on Biden and Powell to present plans to fight inflation now.
“The president’s refusal to address this critical issue has a direct negative effect on Floridians and families across our nation, and hurts low- and fixed-income Americans the most,” Scott said in a news release last week. “It’s time for Biden to wake up from his liberal dream and realize that reckless spending has consequences, inflation is real and America’s debt crisis is growing. Inflation is rising and Americans deserve answers from Biden now.”
Economic teams in recent administrations spent little time worrying about inflation, because inflationary pressures have been tame for decades. It has fallen short of the Fed’s average target of 2% for 10 of the last 12 years, topping out at 2.5% in the midst of the longest economic expansion in history.
Shortly before the pandemic recession hit the United States in 2020, President Donald Trump’s economic team wrote that “price inflation remains low and stable” even with unemployment below 4%. As the economy struggled to climb out from the 2008 financial crisis under President Barack Obama, White House aides feared that prices might fall, instead of rise.
“Given the economic crisis, we worried about preventing deflation rather than inflation,” said Austan Goolsbee, a chairman of the Council of Economic Advisers during Obama’s first term.
The conversation has changed given the large amounts of money that the federal government is channeling into the economy, first under Trump and now under Biden. Since the pandemic took hold, Congress has approved more than $5 trillion in spending, including direct checks to individuals.
Biden’s aides are sufficiently worried about the risk of that spending fueling inflation that they shaped his infrastructure proposal, which has yet to be taken up by Congress, to funnel out $2.3 trillion over the course of eight years, which is slower than traditional stimulus.
Even before Summers and others raised economic concerns about Biden’s $1.9 trillion relief bill, officials were wrestling with their own worries about its inflation risks. They had internally concluded, with direction from Biden, that the biggest risk to the economy was going “too small” on the aid package — not spending enough to help vulnerable Americans survive continued stints of joblessness or lost income. But they wanted to know the risks of going “too big.”
They tested whether an uptick in inflation might cause people and financial markets to expect rapid price increases in the years to come, upending decades of what economists call “well-anchored” expectations for prices and potentially creating a situation where higher expectations led to higher inflation. They estimated the odds that the Fed would react to such moves by quickly and steeply raising interest rates, potentially slamming the brakes on growth and causing another recession.
The informal group that initially gathered to research those questions included Bernstein; David Kamin, a deputy director of the National Economic Council; Michael Pyle, Vice President Kamala Harris’ chief economic adviser; and two Treasury officials, Nellie Liang and Ben Harris. More members have joined over time, including Tedeschi.
The group reports regularly to Yellen and other senior officials including Brian Deese, who heads the National Economic Council, and Cecilia Rouse, who leads the Council of Economic Advisers. Its work has informed economic briefings of Biden and Harris.
“The president and the vice president, their job is to deliver good economic outcomes for the American people,” Pyle said in an interview. “Part of what delivering strong economic outcomes to the American people means is ensuring that their team is fully on top of both the tail winds to the U.S. economy but also the risks that are out there. And this is one of them.”
Pyle and his colleagues looked at financial market measures of inflation expectations, including one called the five-year, five-year forward, which currently shows investors expecting lower inflation levels over the next several years than they expected in 2018.
At the same time, officials at the Treasury’s Office of Economic Policy conducted a series of modeling exercises to “stress test” the virus relief package and how it might change those price and expectation measures if put in place. They considered scenarios in which consumers quickly spent their aid money, which included $1,400 checks, and scenarios in which they did not spend much of it at all right away. They talked with large banks about trends in customers’ cash balances and how quickly people were returning to the workforce. Yellen, a former Fed chair, helped adjust the models herself.
The exercises produced a wide range of possibilities for inflation. But they never suggested it would rise so rapidly that the Fed could not easily handle it by adjusting interest rates or other monetary policy tools. They saw no risk of a sharp return to recession — and no reason to pull back from spending proposals that administration officials believe will help the economy heal faster and help historically disadvantaged groups, like Black and Hispanic workers, regain jobs and income.
“We’re going to see some heat in this economy,” Pyle said. “That heat is going to be good and redound to the benefit of wages and labor market conditions overall and particularly for a number of communities that have been at the margins of the labor market for too long.”
If the data proves that forecast wrong, officials say privately, they will be quick to adapt. But they will not say how. If inflation were to accelerate in a sustained and surprising way, some officials suggest, the administration would trust the Fed to step in to contain it.
There is no plan, as of yet, for Biden to consider inflation-fighting actions of his own.