Joe Manchin's Rationale for Inflation - WSJ

Senator Joe Manchin leaves the Senate Chamber at the United States Capitol on December 9. ...


Senator Joe Manchin leaves the Senate Chamber at the United States Capitol on December 9.


Photo:

Stefani Reynolds / Bloomberg News

Forget the transient. Inflation is now persistent, and very high. The Labor Department reported on Friday that consumer prices in November had risen 6.8% in the past 12 months, the highest since 1982. That should be the only warning Democratic skeptics need to put forward. aside from President Biden’s Build Back Better law which could fuel more inflation.

Mr Biden attributed the 39-year high in inflation to car and energy prices on Friday, but it does not go unnoticed. Price increases are widespread, as they have been in recent months. Meat prices are up 16% year-over-year, furniture 11.8% and clothing 5%. Even the “core” index, which does not include volatile food and energy prices, rose 4.9%.

***

The White House’s claim that inflation will come down soon would be more credible if it and the Federal Reserve had not said so since the spring. Overall prices rose 0.8% in November while the benchmark climbed 0.5%. These monthly increases are double what they were from July to September.

Democrats attributed the rise in inflation in the spring to soaring used car prices, which they said would soon drop. But they are still up 31.4% over the year and 2.5% in November. Inflation has increased because price increases have become widespread.

No worries, President Biden assures us that price increases will slow as pressures on the supply chain ease. Who knows when it will be? In any case, the prices will not go down. The rate of increase may moderate, but many business executives said this fall that they plan to increase prices further next year to offset rising costs for labor and materials. .

Another White House inflation excuse: Demand for goods increased during the pandemic as people cocoon and cut spending on services. This was true earlier in the pandemic. But spending on services has exceeded pre-pandemic levels since June, and prices for non-rent services rose 3.6% last year.

The headline CPI may even underestimate inflation because it reduces soaring housing costs. It shows that rents have only increased by 3% in the past year, while owners’ equivalent rent has increased by 3.5%. Yet real estate websites are reporting double-digit increases in rents and house prices, exceeding 20% ​​in many Sun Belt metropolitan areas.

For too many Americans, inflation is eroding wage gains. Average hourly earnings after inflation for all employees fell 0.4% in November and are down 2.7% so far this year. This harms low-income workers more, as they have less cushion to afford basic necessities which are rising in price. They also spend more of their income on energy, food and rent.

Workers have noticed that their wages do not keep pace with inflation and demand a wage increase. See

Deere

& Co. recently ratified the collective agreement which provides for generous salaries that will be adjusted quarterly according to the cost of living. Rising prices will fuel higher wage demands which will further anchor a wage-price spiral.

The budgetary implications are serious even without the BBB bill. The Congressional Budget Office’s benchmark budget last month showed the United States will spend $ 5.9 trillion in fiscal year 2022, which began on October 1. The 6.8% inflation factor and spending would increase by $ 400 billion even if Congress did not pass the BBB.

According to the CBO, the overall spending of the bill will be distributed over the decade, with an impact on the deficit in 2022 of around 0.6% of GDP. Treasury Secretary Janet Yellen said this “modest impact on the short-term net deficit should not lead to economic overheating.” But most of the spending in the bill that’s about to be scrapped will ultimately be made permanent.

The Joint Committee on Taxation and the CBO estimate that the expanded $ 3,600 child tax credit, which lasts only one year in the bill, alone will cost $ 1.6 trillion over 10 years. That’s almost all of the $ 1.75 trillion that Senator Joe Manchin said was his 10-year high. The Committee for a Responsible Federal Budget estimated that making all of the bill’s temporary provisions permanent would cost nearly $ 4.7 trillion. The enlarged welfare state will not be transitory.

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The causes for all of this are clear: Democratic spending spurred an increase in demand at the same time as supply was constrained by the pandemic and labor shortages caused by government incentives not to work. It will get worse with the taxes and regulation of BBB. Jerome Powell and the Fed helped by encouraging this overspending and maintaining a historically easy monetary policy long after the pandemic economic emergency ended.

This inflation is exactly what Mr Manchin warned against this summer, and it was justified. He should go his gut and put BBB aside for now, and make it clear that before any resumption next year, he needs to be honestly rated for his true spending burden. It would also be better for the Democratic Party and Mr Biden, who now own the inflation that has occurred under their watch.

The Fed, which is late, will have to step up bond tapering and rate hikes. Tighter money comes with risk. But letting inflation gain ground will make policy correction even more difficult and the pressure on America’s living standards worse.

Correction: A previous version distorted the Fed’s bond reduction policy.

Newspaper Editorial Report: Paul Gigot interviews former Trump economic chief Kevin Hassett. Images: Bloomberg News Composite: Mark Kelly

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Published in the print edition of December 11, 2021.

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