YESTERDAY’S TERRIBLE INFLATION REPORT has three major policy implications: first, additional spending legislation looks increasingly unlikely; second, state officials assess the relief of shocked consumers; third, the Federal Reserve must brake aggressively.
INFLATION COULD REACH BY SPRING, based on year-over-year comparisons, but high gasoline prices, supply chain bottlenecks and upward wage pressure are expected to persist for much of the summer. In the meantime, 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; this number will probably decrease by a few more points.
AFTER YESTERDAY’S REPORT, DEMOCRATS CONSIDE THE HOUSE is likely lost. Republicans need a gain of just five seats in November, and some analysts believe the GOP will win a net 30 seats. We believe the Democrats may only lose 15-20 seats, but the question is not whether the House will fall, but by how much – and the Senate is also at stake.
POLITICAL IMPLICATIONS: First, Sen. Joe Manchin (DW.Va.) was vindicated; the economy is too hot to accommodate new spending. President Biden’s Build Back Better bill is about sustaining life; maybe a few watered-down provisions can be passed, but new spending has little support, as US debt now exceeds $30 trillion.
MANCHIN SAYS HE COULD ACCEPT tax hikes on very wealthy, very profitable corporations, but he may be saying that to please his constituents in West Virginia. who support taxing the rich. But another hard-nosed Democrat, Senator Kyrsten Sinema, opposes most new taxes.
SECOND, ATTENTION MAY SHIFT to the states, where governors are dusting off proposals to cut the gas tax and eliminate taxes on groceries. Most states are teeming with cash thanks to the roughly $6 trillion in federal stimulus passed in 2021, so we expect tax relief to become a hot topic.
VULNERABLE DEMOCRATS – The senses. Maggie Hassan (NH) and Mark Kelly (Arizona) – reacted to the inflation report yesterday by announcing a proposal to suspend the federal gas tax until the end of the year. That would lower the cost of a gallon of gasoline by 18.4 cents through January. Other Democrats renewed their calls for controlling prescription drug prices.
AND A REPUBLICAN TO WATCH — Virginia Gov. Glenn Youngkin (R) — has called for the elimination of the state’s 2.5% grocery tax. Youngkin also proposed reducing the state gasoline tax by 5 cents per gallon.
THIRD, POLICY FOCUS will be on the Federal Reserve, which has come under increasing criticism for its bloodthirsty dismissal of an inflation threat last summer. Now, central bankers will have to consider a 50 basis point rate hike in March or May, accompanied by an accompanying move to start shrinking their balance sheets.
THE RISK, AS MONETARY POLICY TIGHTENS and inflation remains high, is that the Fed overdoes its moderation, raising the outlook for an economic slowdown in 2023.
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