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Date : May 22, 2022

Biden Sinks as Inflation Spikes, Imperiling Democrats’ Midterm Fortunes

On Tuesday, President Joe Biden traveled to Iowa to tout his administration’s latest effort to lower the cost of gasoline: lifting a ban on the use of 15% ethanol in fuels during the summer.

It is a modest step that experts say will shed a few pennies off the cost of gasoline, as ethanol is cheaper than gas.

But the move was as much politics as it was economics. Earlier in the day, the government reported that inflation had risen at an annual rate of 8.5% in March, higher than expected and at a level last seen in 1981. The White House on Monday warned the number would be “extraordinarily elevated” in an effort to get in front of the damaging news.

At the Iowa stop, Biden also pointed to his decision to unlock 1 million barrels of oil a day from the nation’s Strategic Petroleum Reserve as evidence he is tackling the issue of high gas prices.

“I’m doing everything within my power, by executive orders, to bring down the prices and address the Putin price hike,” Biden said, referring to the invasion of Ukraine by Russian President Vladimir Putin in late February.

But no amount of sloganeering or actions that may cut the price by a small amount will undo the economic – and political damage – that inflation is doing to the country and the fortunes of Democrats as they approach the critical November midterm elections.

“When a working mom, like mine growing up, is forced to make the impossible choice of putting another gallon in the tank or buying what she needs to feed her family, she wants leadership, not finger pointing,” Sen. Rick Scott, who heads the Republican’s reelection effort in the Senate, said in a statement Wednesday.

“I hear it every week from families in my state,” the junior senator from Florida said. “Floridians are SICK AND TIRED of watching Blame-Game-Biden duck responsibility for the crisis he has created.”

“This week’s CPI and PPI reports prove that Biden’s reckless tax-and-spend agenda has been a disastrous failure,” Scott added, referencing the March consumer price and producer price index reports. “The president can cast blame all he wants, but he can’t hide from the truth and Florida families don’t believe his lies.”

Polls confirm the toll inflation is taking on Biden and his party, even as the price of oil has fallen and average gas prices are down 25 cents from mid-March. Experts attribute that to global increases in production as well as the announcement of releases from U.S. reserves and those of other countries, along with market adjustments to the ongoing war in Ukraine.

An Ipos/ABC News poll released on Sunday found opinions on Biden’s handling of the increase in gas prices fall mainly along partisan lines, with Americans blaming Democrats more than Republicans.

While more than two-thirds, 71%, blame Putin and a slightly less percentage, 68%, pointing the finger at oil companies, 52% lay the blame on Democrats and 51% specifically on Biden whereas 33% say Republicans and 24% former President Donald Trump.

But when measured by party, 93% of Republicans blame Biden compared to 41% of Democrats.

And a recent found 63% of those surveyed disapproving of Biden’s handling of the economy – a 20-point increase in a year.

“To an extent, Biden and the Democrats are going to be the victims of gas prices,” says Chris Jackson, who heads polling for Ipsos. “It’s unclear how much control he has over his own fate.

“You shouldn’t underestimate the partisan nature of the polling,” Jackson adds. Inflation is being used as a political cudgel.”

While Putin’s invasion did send oil and gasoline prices spiking, inflation has been running hot for a year now. Economists cite a variety of factors, including a tight labor market, a faster-than-predicted recovery from the shocks of the coronavirus, and massive fiscal and monetary stimulus from Washington in 2020 and 2021 to fight the economic effects of COVID-19.

The flip side is that job growth has been extraordinary, with the unemployment rate now at 3.8% compared to a record 14.8% in April 2020 and an economy that grew 5.7% last year.

But it is inflation that is grabbing the headlines, especially since the majority of the population was either not alive or not of working age the last time prices were this high.

“I think part of the issue is that we hadn’t seen inflation for a very long time,” says Wayne Winegarden, a senior fellow in business and economics at the Pacific Research Institute. “People had forgotten how horrible it is and how devastating it is.”

And it has turned the politics on its head. Many Republicans – and even some Democrats – are now blaming the runaway prices on too much money being pumped into the system, even though most of them favored such action back in 2020. Both the $1.9 trillion CARES Act and a second $900 billion coronavirus relief bill passed in the waning days of Trump’s presidency with overwhelming bipartisan support.

But that changed once Biden took office and as vaccinations began to become widespread, allowing Americans the economy to begin returning to normal. The $2 trillion American Rescue Plan passed by the slimmest of margins in March 2021, with West Virginia Democratic Sen. Joe Manchin being the pivotal vote.

“We threw money at” the virus response, Winegarden says. “And all the politicians were in on it. Now, there’s spinning on all sides, trying to deflect the blame.”

Initially, the rise in prices was contained. Sure, the price of lumber soared. But unless you were buying a house or adding on a deck, it didn’t matter. Used car prices surged as new cars were hard to come by because of semiconductor shortages. But, again, the effect was limited.

The upward trajectory for consumer prices really began in April 2021, when they hit 4.2% on an annual basis. They held in the mid-5% range for much of the summer and then took a sharp turn upward in the fall before reaching their current 8.5% level. The trend does coincide with the outbreaks of the delta and omicron variants of the virus but also the growing pace of the economy.

Biden’s approval has tanked along with the spike in inflation, as can be seen dramatically in a Gallup poll released Thursday. During the early days of his presidency, from January to June 2021, an average of 56% of Americans approved of the job he was doing, according to Gallup.

But by July and August, as divisions emerged over lockdowns and masking policies, the downward spiral began, leaving Biden’s approval in the low 40s. While Gallup now has his approval at 42%, there are some wide variations by age with Generation Z (those born between 1997-2004) having him at 39% and 48% of the oldest (those born before 1946) giving him the thumbs up.

At the heart of the inflation issue is the cost of energy. As costs began to move upward to meet rising demand, they worked their way into the economy’s entire food chain, in some cases literally as people found out when they went grocery shopping.

And what they buy matters. Tad Carmody, a principal in EY’s consulting practice who focuses on consumer goods companies, says the cost of energy plays an important role in the price of meat and dairy, for example, but less so in cereal. But it factors heavily into the overall costs of logistics, including warehousing, trucking and delivery.

“The impact comes through very quickly,” Carmody says. “These large consumer goods companies are able to take those prices and push them through to the consumer.”

Meat, for example, is labor intensive from the slaughterhouse to the delivery truck. Then, while it is being shipped and displayed in the store case, it needs refrigeration. All require energy. “A box of cereal has a lower concentration of energy,” he adds.

But Carmody says there is some evidence consumers are shifting buying patterns, favoring store brands and volume purchases at outlets such as Costco and Sam’s Club.

This week, Manchin came out guns blaring against Biden and Fed Chairman Jerome Powell’s actions in dealing with inflation. The Democratic senator has been signaling his concern about inflation for some months now, using it as the reason for putting the kibosh on Biden’s ambitious Build Back Better legislation.

“When will this end?” Manchin asked on Tuesday. “It is a disservice to the American people to act as if inflation is a new phenomenon. The Federal Reserve and the administration failed to act fast enough, and today’s data is a snapshot in time of the consequences being felt across the country.”

“Instead of acting boldly, our elected leaders and the Federal Reserve continue to respond with half-measures and rhetorical failures searching for where to lay the blame,” Manchin added. “The American people deserve the truth about why record inflation is happening and what must be done to control it.”

Powell is now seen by many as being too slow to shift the Fed’s easy money approach and has been knocked for his insistence throughout much of 2021 that inflation was “transitory” – a term echoed by the Biden White House throughout 2021 – and largely the result of disruptions caused by the pandemic.

Ironically, Powell enjoyed bipartisan support throughout much of 2021, even though some such as Democratic Sen. Elizabeth Warren of Massachusetts and Republican Sen. Pat Toomey of Pennsylvania repeatedly expressed their concerns with his policies, although for quite different reasons.

The term “transitory” has become as much a four-letter word in Washington as bipartisanship these days, except when used in derision. And Powell has since issued his own mea culpa as the Fed begins hiking interest rates in earnest.

“The rise in inflation has been much greater and more persistent than forecasters generally expected,” Powell acknowledged in a speech to business economists in late March. “For example, at the time of our June 2021 meeting, every Federal Open Market Committee (FOMC) participant and all but one of 35 submissions in the Survey of Professional Forecasters predicted that 2021 inflation would be below 4 percent. Inflation came in at 5.5 percent.”

“Why have forecasts been so far off?” Powell asked. “In my view, an important part of the explanation is that forecasters widely underestimated the severity and persistence of supply-side frictions, which, when combined with strong demand, especially for durable goods, produced surprisingly high inflation.”

As for Biden, it’s a truism that presidents have little direct control over the price of oil or a gallon of gas. Oil is a global commodity and prices are largely dictated by supply and demand, as well as the oil nations of the Middle East and Russia. While America is a major oil producer, its ability to turn up production quickly is limited and much of the production is in the hands of private companies.

History offers some caution, too, for presidents seeking to tame the beast of inflation.

In 1971, surprising Democrats who had given him the authority, Richard Nixon imposed a freeze on all wages and prices – an act unthinkable in today’s political climate but widely popular with consumers at the time.

Nixon removed them following his reelection, and then the stock market cratered and inflation soared. In 1973, he again imposed wage and price controls as Watergate was dogging his presidency, only to face a unilateral decision by Saudi Arabia to double oil prices and a follow-on embargo by the Organization of the Petroleum Exporting Countries.

When Gerald Ford took over following Nixon’s resignation, he declared inflation “Public Enemy No. 1” and asked Americans to join him in a campaign to “Whip Inflation Now.”

Unfortunately, the “WIN” button he wore on his lapel has been shown to have had more lasting value than his economic policies.

Most forecasts show inflation may cool somewhat in the months ahead with the Fed’s favored measure at 4.3% this year, up from 2.6% in December, and 2.7% next year instead of 2.3% earlier.

And there were some positive signs in the March numbers showing a decline in the rate of price increases for used cars and some meats.

And the University of Michigan consumer sentiment index for April showed a surprising 10.6% bump, with the expectations index rising 18% alone.

“Perhaps the most surprising change was that consumers anticipated a year-ahead increase in gas prices of just 0.4 cents in April, completely reversing March’s surge to 49.6 cents,” said Richard Curtin, the survey’s chief economist. “Retail gas prices have fallen since the March peak, and that fact was immediately recognized by consumers.”

“The shift in gas price expectations may be partly due to Biden’s announced release of strategic oil reserves and the relaxing of some seasonal EPA rules,” Curtin added, while offering a note of caution. “Nonetheless, the April survey offers only tentative evidence of small gains in sentiment, which is still too close to recession lows to be reassuring.”

But that uptick will surely be used by the White House to suggest it has turned the corner. Still, as long as the war in Ukraine continues and global demand remains strong in a post-pandemic world, it is unlikely the headline number of inflation will fall to the levels seen before the coronavirus struck.

The world has enjoyed a period of very low inflation, even disinflation, for some time now due to myriad reasons including immigration, globalization, technological progress and the emergence of democracy in many regions of the world.

That era is now threatened around the globe as well as in the U.S. Demographics have empowered workers and wages are rising, though not quite enough for many to counter inflation. Free trade has come under attack in many countries, notably the U.S. during the Trump administration. Politics has become more polarized and it is hard to imagine a bipartisan approach to fighting inflation. The Fed will likely be able to choke off some of the inflationary pressures, but the cost could well be a recession.