In August, inflation appeared to decelerate. But the Bureau of Labor Statistics reported Wednesday that it picked up again in September — increasing 0.4 percent from the previous month and 5.4 percent from a year earlier — bringing fresh anxiety about how long Americans would have to struggle with rapidly rising prices. This comes on top of months of growing or steady inflation before August. “Core” inflation, a metric from which volatile sectors such as energy are removed, still saw a 4 percent hike in September from one year before. Rising prices are not just hitting auto-consumers, but home and furniture buyers, drivers filling up their gas tanks and Americans who need to replace home appliances.
These figures still put the nation far away from a 1970s-style inflationary spiral. But low-income workers are often the first to struggle to pay higher prices. Over time, inflation could encourage people to spend more money immediately, before their money becomes less valuable, raising prices further and sparking a pro-inflationary cycle.
The nation’s leaders cannot ignore the threat, a distinct temptation because decades of modest inflation have erased memories of the economic havoc inflation wreaked in the 20th century. The Fed must keep a close eye. And Congress should avoid expansionary fiscal policy that might push prices higher. In other words, Democrats must fully pay for their big social spending and climate change bill.
Sen. Joe Manchin III (D-W.Va.), a crucial vote Democrats must get to advance their “reconciliation” bill, has said that he fears large new federal spending programs would stoke inflation. Advocates for the bill have been able to respond, reasonably, that it is not stimulus legislation, in which the government injects borrowed money, much of it from abroad, into the economy to boost flagging demand. Rather, it is a set of structural social and environmental reform programs that Democrats plan to finance with new taxes and savings from prescription drug negotiations. The goal is to make the country fairer and more efficient in the long term. Harvard economist Jason Furman points out that President Biden’s spending plans would net out to provide essentially no added fiscal stimulus.
But this works only if the bill is paid for as advertised. There is more riding on the Democrats getting this right than whether the nation’s debt will grow larger. For the first time in more than a generation, lawmakers have the serious threat of inflation to consider. Washington’s usual pattern, in which big legislation passes once everyone agrees to load up on more debt, is not an option this time.