By Jeanna Smialek
President Joe Biden used his State of the Union address to refocus the nation on how far the economy has come since the pandemic recession. But he also highlighted his plans to help slow rapid price gains, underscoring the challenge Democrats face before the midterm elections: Inflation is painfully high, voters are unhappy about it, and the most tried and true way to cool price increases involves hurting growth and the labor market.
Biden struck a defiant tone in the face of that glum outlook, insisting that his administration can take steps — including encouraging corporate competition and strengthening a supply chain that has struggled to keep up with consumer demand — to slow price increases without dragging down employment and pay.
“One way to fight inflation is to drive down wages and make Americans poorer,” Biden said, describing the way central bank policies work. “I think I have a better plan to fight inflation.”
The challenge is that White House policies have historically served as a backup line of defense when it comes to containing inflation, which is primarily the Federal Reserve’s job. The central bank is prepared to move swiftly in the coming months to raise interest rates, making money more expensive to borrow and spend. Higher rates are meant to slow hiring, wage growth and demand enough to tamp down price increases.
It is possible that inflation could ease up so much on its own this year that the Fed will be able to gently slow the economy toward a sustainable path. But if price gains remain rapid, the Fed’s playbook for combating overheating is by inflicting economic pain.
That makes inflation — which is running at the fastest pace in 40 years — a major liability for the Biden administration, one that the president addressed repeatedly Tuesday night and called his “top priority.” It is undermining consumer confidence by chipping away at paychecks and causing sticker shock for consumers trying to buy groceries, couches or used cars. And the cure could begin to hamper a solid economic rebound just as Democrats are trying to make their pitch for reelection to voters.
“The biggest problem for President Biden is that there’s no good way to message inflation,” said Jason Furman, a Harvard economist and a White House economic official during the Obama administration. “There’s not a lot that he can do about it, but he can’t get up there and say: The only solution here is patience and the Federal Reserve.”
Furman said that while the sort of solutions the president laid out — ideas to improve supply chains and expand workforce opportunities — were “the right things” for the administration to do, the nation should not be “under any illusion that it is going to add up to a lot” in terms of cooling rapid price gains.
Biden said his administration would begin a “crackdown” on ocean shipping costs, which have soared during the pandemic. He suggested that the administration wanted to cut the cost of prescription drugs, an ongoing push of his.
While he repeatedly returned to the higher costs facing consumers, the president also tried to center attention on the economic wins of his term, which has seen the labor market strengthen markedly.
The economy has added 6.6 million jobs back since Biden took office, unemployment is poised to fall below 4% and growth has been more rapid than in many other advanced economies. The strength and scope of the rebound has surprised economists and policymakers, who often credit relief packages rolled out under the Trump and Biden administrations for fomenting such a quick recovery.
But some economists warned last year that the $1.9 trillion legislation the administration ushered through Congress in March 2021 was too big and too poorly targeted, and that it would stoke demand and help to fuel rapid price gains. While fiscal policy was not the only reason inflation popped last year, it does seem to have contributed to high prices by encouraging more consumption.
The cost of food, fuel, housing, vacations and furniture are all rising rapidly — and as conflict in Russia threatens to further push up gas prices in the coming months, the situation is likely to get worse before it gets better.
While the White House spent last year downplaying popping prices, arguing that they would fade with the pandemic as roiled global supply chains righted themselves, nearly a full year of high inflation readings have proved too much to ignore. Climbing costs are eating away at paychecks and helping to drive Biden’s poll numbers to the lowest point so far in his presidency.
“I don’t think that it is going to go away in a way that is going to save the incumbent party by November,” said Neil Dutta, an economist at Renaissance Macro Research. “Even though the labor market is quite strong, it’s not enough to keep pace with the shock people are feeling with respect to inflation.”
The Fed is expected to raise interest rates from near-zero at its meeting this month, and officials have signaled that they will then make a series of increases throughout the year as they try to put a lid on inflation.
“The Fed has to be more aggressive on inflation,” said Diane Swonk, chief economist at Grant Thornton. “It could bleed into the unemployment rate by the end of the year.”
Furman said that he thought it was more likely that the Fed’s actions would not inflict too much pain this year, although they might begin to squeeze the job market in 2023. And Dutta speculated that the Russian invasion of Ukraine could slow the central bank down somewhat, at least in the near-term.
“The Fed basically has a choice: They can sink the economy into a recession or they can let inflation run a little bit,” Dutta said. “They’re not going to risk a recession with the geopolitical situation we’re in.”
The conflict overseas may also give Biden and Democrats a moment of patriotism to capitalize on. So far, Biden’s sanctions have been well-received by voters, based on the results of an ABC/Washington Post poll.
At the same time, higher gas pump prices resulting from the conflict could further dent consumer confidence. Sentiment has swooned as price increases have climbed, and tends to be very responsive to fuel costs. The price of a barrel of gas climbed above $100 on Tuesday, the highest since 2014, based on a popular bench mark.
The question is whether, in the face of rising costs, the administration will be able to turn bright spots — international cooperation and the pace of recent job gains — into something salient for consumers and voters.