The Real Inflation Threat

CHANCES OF ENACTING AN INFRASTRUCTURE BILL by late summer improved yesterday as a bipartisan group of Senators agreed on a tentative deal. But two enormous obstacles may persist in talks with President Biden when he returns from Europe.

THE DOLLAR AMOUNT OF A DEAL, roughly $1.2 trillion over eight years, is close to what Biden could accept. But the two obstacles may take several weeks to resolve —

Obstacle 1 — How to pay for it? Participants in the talks claim that their bill is fully paid for, but it includes some new type of gasoline tax, indexed for inflation, which is a non-starter for the White House. And it includes money still not spent from previous covid relief bills; the idea of clawing back money from states now flush with cash also is a non-starter.

Obstacle 2 — Intense opposition from progressives, who scoff at a proposal so far below Biden’s initial $2.25 trillion goal, and the left’s fears of abandonment on the aggressive green energy goals that Biden proposed earlier this year. A moderate Senate bill could clash with an activist House measure, producing a conference committee deadlock between the two versions that could last for weeks, one source tells us.

NEVERTHELESS, A SCALED-BACK BILL has a chance of enactment before Labor Day, potentially a major win for Biden to accompany the $1.9 trillion Covid aid bill he got two months ago. But we continue to believe a second bill — nearly $2 trillion in social spending — is on life support, and a major tax hike faces an uphill path.

AMID THE CACOPHONY OF COMMENTARY on inflation, we’ll add this quick point: most of the commodity inflation — lumber, corn, copper, etc. — will subside; in fact, some commodity prices already are subsiding. The real inflation threat is an intractable wage spike that may not subside.

WE CONTINUE TO BELIEVE THAT UNEMPLOYMENT may drop below 5% by year-end; it’s 5.8% now. In the uncharted waters following the pandemic, what will constitute full employment? We think the Federal Reserve will begin to worry by winter that full employment is imminent.

THE BIDDING WAR FOR LABOR will continue to be intense, even as workers return when unemployment benefits taper off. Companies will have to pay more in wages and benefits, and pass those costs on to their customers. That’s the inflation threat — not transitory commodity prices — that will prompt the Fed to become less accommodative.

Related: The Rich and Taxes

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