It could take months before it’s clear whether the current rise in inflation is temporary. But the steady climb is already weighing on numerous policy debates. Republicans pushed back hard on President Biden’s proposal to spend $4 trillion on infrastructure and other proposals, complaining that it amounted to an infusion of too much money at a time when prices on certain products were rising much faster than wages. GOP opposition has led the White House to rethink its spending strategy in recent weeks.
The most recent inflation figures, released Thursday by the Bureau of Labor Statistics, do not seem to have forced any course-correction decisions inside the Biden administration or at the Fed. Both predict that prices will continue to rise until supply chains and consumer demand recalibrate and the economy recovers. The Fed, which is charged with keeping prices stable and unemployment low, says it won’t rush to raise interest rates and tamp down on inflation until the labor market has time to heal.
“As the virus is contained, the economy is improving, step-by-step,” tweeted Heather Boushey of the White House’s Council of Economic Advisers. “Today’s data on inflation is the latest indicator that things are both moving in the right direction and that we have supply-chain hiccups.”
The White House and Democrats in Congress argue that rising inflation is not only temporary, but that it’s also a feature of a rebounding economy. More widespread vaccinations and lower coronavirus case counts are helping Americans return to their old spending habits and unleash months of pent-up savings. The economy added 559,000 jobs in May, and the first four months of Biden’s presidency have seen more than 2 million jobs added back on the payrolls.
Yet Republicans have a much different diagnosis of the economy, and they seized on Thursday’s inflation data to issue their latest warnings. The GOP points to the $1.9 trillion stimulus package Biden signed in March, arguing that such a sprawling bill will overwhelm the economy and put the Fed behind the curve when it comes to reining in inflation.
“There's no question that it feeds political narratives,” said Grant Thornton chief economist Diane Swonk of Thursday’s data. “It’s not clear that it solves the political debate.”
Sen. Patrick J. Toomey (R-Pa.) pointed to the Fed’s commitment to keeping interest rates low and not yet dialing back its other economic supports. Toomey told The Post that the Fed “will eventually have to react in a more draconian way because they’re so far behind the curve.”
“How do you know if something’s been transitory until enough time has passed, and it hasn’t been?” Toomey said. “Given especially the fact we have known for a very long time that monetary policy acts with long and unpredictable lags, it’s a very dangerous position we’ve put ourselves in.”
Sen. Mike Crapo (R-Idaho) called out the “explosive spending here in Congress.”
“The correct policy is to control our deficits and start to get back to a much more stable fiscal policy in terms of spending,” Crapo told The Post.
The labor data also showed that prices rose 0.6 percent in the past month.
A large share of May’s inflation gains came from the car market. The price of used cars and trucks continued to surge, rising 7.3 percent in May compared with April. That followed a 10 percent increase in April.
A complicated and unusual range of factors have seized on the market for used cars and rental cars, triggering nationwide shortages. Many rental car companies sold their fleets during the pandemic, leaving them short as Americans start traveling again. On the supply-chain side, a shortage of semiconductors has also made it hard for companies to restock their lots.
Prices for household furnishings and services increased 1.3 percent in May, its largest monthly increase since January 1976, according to the Bureau of Labor Statistics. The indexes for domestic services, along with categories tracking furniture and bedding, helped drive the increase.
Gas prices have surged 56.2 percent during the past year, and the energy index overall is up 28.5 percent compared with May 2020.
The Fed is charged with keeping prices stable and the unemployment rate low. For now, it is not rushing to control inflation until substantial progress has been made in the labor market, which is still down 7 million jobs.
On Saturday, Treasury Secretary Janet L. Yellen said inflation could rise as high as 3 percent over the entire year, which would be considered high for the United States. Still, it’s unclear just how high inflation will be allowed to climb, and for how long, before policymakers in the administration and the Fed see cause for concern.
Former treasury secretary Lawrence H. Summers, a Democrat who has been openly critical of Biden’s economic agenda, said that it is time policymakers “adjust to economic reality.”
“Six months ago, it was reasonable to see continued covid, inadequate demand, a return to a recession and possible deflation as central risks,” Summers told The Post. “That is now not remotely plausible. … Ultimately there is more confidence when policymakers are in touch with the reality that people are seeing.”
Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute, said inflation could eventually simmer back down to more sustainable levels. But Strain said that right now, the Fed could go further in sending a simple yet important message: There’s still plenty of uncertainty ahead.
“I do think the Fed needs to do a better job at convincing markets that it’s at least aware of what’s happening, and that it’s aware that there are risks there,” Strain said. “The blasé attitude the Fed has had toward inflation, and toward these risks, has been really surprising, and I think it’s time for that attitude to change.”
Fed and administration officials point to factors that they say are temporarily driving up prices. Demand for goods and services — including on things such as concert tickets and restaurants — is rebounding as more people are vaccinated and eager to spend. Meanwhile, supply chains are struggling to catch up. Economists say those bottlenecks will smooth out over time — and require patience from consumers and policymakers alike.
“I sort of look at what we’re going through as friction upon reentry,” Swonk said. “We still have a while before parachutes open and we hit the cool waters of splashdown.”
Airline tickets are a prime example. Prices rose 7 percent in May after surging 10.2 percent in April.
But in some instances, prices are already starting to cool. Data show prices for hotels and motels rose 7.6 percent in April. They increased only 0.4 percent in May.
Some economists are watching the cost of rent, which makes up a large share of many Americans’ budgets. Rental prices didn’t swing wildly during the pandemic and only increased 0.2 percent in May. But it’s still up 1.8 percent from last year. Once rent rises and tenant are locked into leases, it may be harder for rent to come back down. Only time will tell.
Generally, policymakers expect inflation figures to taper off in the year to come. That’s in part because the super-low readings from the pandemic’s early days will gradually shift out of the calculation.
“While, no doubt, the top-line increase in inflation will command the attention of policymakers at the Federal Reserve, the underlying tone and tenor of the data will not result in any change of policy,” wrote Joe Brusuelas, chief economist at RSM, in an analyst note.
Andrew Van Dam contributed to this report.