YESTERDAY’S TERRIBLE INFLATION REPORT has three major policy implications: first, additional spending legislation looks increasingly unlikely; second, state officials are weighing relief for shell-shocked consumers; third, the Federal Reserve has to hit the brakes aggressively.
INFLATION MAY PEAK BY SPRING, based on year-over-year comparisons, but high gasoline prices, supply chain gridlock and upward wage pressure are likely to persist well into the summer. By then, voter attitudes will begin to harden, as the fall elections approach.
BEFORE YESTERDAY’S DATA, President Biden had a dismal 37% approval rating on his handling of the economy; that number probably will fall by a few more points.
AFTER YESTERDAY’S REPORT, DEMOCRATS CONCEDE THAT THE HOUSE is probably lost. Republicans need a gain of only five seats in November, and some analysts think the GOP will win a net of 30 seats. We think the Democrats may lose only 15 to 20 seats, but the issue isn’t whether the House will fall, but by how much — and the Senate also is in play.
POLICY IMPLICATIONS: First and foremost, Sen. Joe Manchin (D-W.Va.) has been vindicated; the economy is too hot to accommodate new spending. President Biden’s Build Back Better bill is on life support; maybe a few watered-down provisions can pass, but new spending has little support, as U.S. debt now exceeds $30 trillion.
MANCHIN SAYS HE COULD ACCEPT tax hikes on the very wealthy and highly profitable corporations, but he may be saying that to appeal to his West Virginia constituents. who support taxing the rich. But another maverick Democrat, Sen. Kyrsten Sinema, opposes most new taxes.
SECOND, THE FOCUS MAY SHIFT to the states, where governors are dusting off proposals to slash the gasoline tax and eliminate taxes at grocery stores. Most states are flush with cash from the nearly-$6 trillion in federal stimulus that passed in 2021, so we expect tax relief to become a hot issue.
VULNERABLE DEMOCRATS — Sens. Maggie Hassan (N.H.) and Mark Kelly (Ariz.) — responded to the inflation report yesterday by announcing a proposal to suspend the federal gasoline tax through the end of the year. That would knock 18.4 cents off the cost of a gallon of gas until January. Other Democrats renewed their calls for prescription drug price controls.
AND A REPUBLICAN TO WATCH — Virginia Gov. Glenn Youngkin (R) — has called for eliminating state’s tax on groceries, which is 2.5%. Youngkin also proposed rolling back the state’s gasoline tax by 5 cents a gallon.
THIRD, THE POLICY FOCUS will be on the Federal Reserve, which is increasingly criticized for its sanguine dismissal of an inflation threat last summer. Now the central bankers will have to consider a 50 basis point rate hike in March or May, with an accompanying move to begin reducing their balance sheet.
THE RISK, AS MONETARY POLICY TIGHTENS and inflation remains elevated, is that the Fed will over-do its restraint, increasing prospects that an economic slowdown might arrive in 2023.
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