Inflation Will Loom Over Tonight’s State of the Union

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President Biden is expected to devote much of his State of the Union address to emphasizing how far the economy has come since the pandemic recession, with plentiful jobs and rising wages. But he will also focus on his plans to help slow rapid inflation, underscoring the challenge Democrats face ahead of the midterm elections: Inflation is painfully high, voters are angry, and the tried and true way to bring prices down is by slowing growth and hurting the labor market.

Mr. Biden will outline a four-part plan for beating back rapid price increases, including encouraging corporate competition and strengthening a supply chain that has struggled to keep up with consumer demand. Specifically, he will detail an effort to drive down ocean shipping costs, which have soared during the pandemic.

But 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 cool 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 is why inflation — which is running at the fastest pace in 40 years — is a major liability for the Biden administration. 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 slow a solid economic rebound just as Democrats are trying to make their pitch for re-election 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 former 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.”

Instead, Mr. Biden plans to argue that his administration’s policies can help to cool down inflation at less of a cost to the economy, by expanding its capacity to produce goods and services, according to White House excerpts from his prepared remarks.

“One way to fight inflation is to drive down wages and make Americans poorer,” he will say, referencing the way that central bank policy works. “I have a better plan to fight inflation.”

Mr. Furman said that while the solutions the president was expected to lay out — ideas to improve supply chains, produce goods more efficiently, and expand work force 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.

The president is also expected to use his remarks on Tuesday to try to refocus voters on the economic wins of his presidency.

The economy has added 6.6 million jobs back since Mr. Biden took office, unemployment is poised to fall below 4 percent 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 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.

As flush consumers spent strongly in 2020 and last year, and as homebound shoppers bought more goods like easy chairs and computers rather than services like manicures and meals out, supply chains struggled to keep up.

Virus outbreaks continued to shut down factories, ports became clogged, and there were not enough ships to go around. The perfect storm of strong buying and limited supply pushed car prices in particular sharply higher, left consumers waiting months on end for new dining room sets, and meant that fancy bicycles were harder to find and afford.

And now, inflation has moved past just those goods affected by the pandemic.

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 Mr. 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 central bank sets policy independently of the White House, and the Biden administration avoids talking about monetary policy out of respect for that tradition. But the timing could be politically tricky. The Fed could prompt an economic pullback that coincides with this autumn’s election season, creating a double whammy for the Democrats in which central bank policy is slowing down job market progress even as inflation has yet to fully fade.

That might be especially true if conflict in Ukraine sends fuel prices higher, further stoking inflation and making consumers expect rapid price increases to continue, some economists said.

“The Fed has to be more aggressive on inflation,” said Diane Swonk, the chief economist at Grant Thornton. “It could bleed into the unemployment rate by the end of the year.”

Mr. Furman said that he thought it was more likely that the Fed’s actions would not inflict too much pain this year, though they might begin to squeeze the job market in 2023. And Mr. 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,” Mr. Dutta said. “They’re not going to risk a recession with the geopolitical situation we’re in.”

The conflict overseas may also give Mr. Biden and Democrats a moment of patriotism to capitalize on. So far, Mr. 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 benchmark.

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.

The answer may hinge on what happens next.

Annual price gains are expected to slow down in the coming months as they are measured against relatively high readings from last year, and as supply chain delays ease somewhat. They could moderate even more later this year if the current elevated goods prices come back down, in the most hopeful scenario.

If inflation moderates on its own and a relatively small response from the Fed is enough to nudge it down further, the economy could be left with strong growth, a booming labor market and a positive outlook headed into 2023.

But increasingly, inflation is expected to fade more slowly.

Economists at Goldman Sachs think consumer price inflation could end 2022 at 4.6 percent, more than twice the level it hovered around before the pandemic. That would mark a slowdown — the measure now stands at 7.5 percent — but it would be much higher than what the Fed normally aims for.

That would allow the administration to talk about a moderation in price gains, but it might not feel like a significant improvement to consumers as they head to the polls.

“Inflation is always political, because it burns, even in a good economy,” Ms. Swonk said. “It creates a sensation of chasing a moving target, which no one likes.”