WASHINGTON — On July 15, 2021, the president of the Federal Reserve Bank of Chicago, Charles Evans, offered a reassuring message to attendees of the Rocky Mountain Economic Summit: “I think we could be facing much less inflation in 2022 than many people think,” he said.
That prediction has failed to materialize. On Wednesday, the Labor Department announced that June’s inflation rate had reached an astonishing 9.1% (as measured against prices in June 2021). Consumer prices rose by 1.3% in June from the month before. Core inflation, which excludes the highly volatile prices of food and energy, also rose 0.7% last month.
It was more bad economic news for the White House, which has strenuously tried to argue that “transitory” surges in demand, coupled with constraints on supply, were causing prices to skyrocket. Those prices were supposed to plummet with time, but are thus far showing only modest signs of doing so.
“There is no doubt that this is a moment of elevated risk,” a senior White House official says. He and others in the administration point to encouragingly low levels of credit card and mortgage delinquency rates as evidence that households are on much firmer ground than they were when, for example, the housing crisis first started to unfold in 2007.
“Households are actually doing very well,” another senior White House official argued. “Our households are projected to come out of the other side of the pandemic in stronger condition than they went in.”
Ordinary Americans do not appear to be convinced. Polls show that inflation is today by far their top concern, while the closely watched consumer sentiment survey from the University of Michigan finds record low levels of confidence in the economy. And high inflation is particularly devastating for the lower-income households that President Biden promised to champion.
Then there is the specter of recession, which could be triggered by overly aggressive counterinflationary measures. “It is kind of threading this needle” between bringing down costs and throwing the economy into a tailspin, said a third White House official, one of several who spoke to Yahoo News on the condition of anonymity.
For their part, Biden’s political opponents say his response to inflation has been disastrous. “There’s just no end in sight to this inflation we’re seeing,” Rep. Kevin Brady of Texas, the leading Republican on the House Ways and Means Committee, told Yahoo News.
Initially, the White House saw inflation as a global problem that would resolve with time, as Cecilia Rouse, chair of the president’s Council of Economic Advisers, wrote in “Historical Parallels to Today’s Inflationary Episode,” an analysis posted to the White House website on July 6, 2021.
Rouse and two co-authors suggested that what was happening in 2021 was akin to the period following World War II, when “inflation surged, then retreated.” The culprits were pent-up domestic demand that a wartime economy could not immediately reorient to meet, combined with devastation abroad.
“The United States of 1946 did not have nearly as many ways of gauging inflation expectations as we do today, but the limited data we have suggest Americans at the time were aware of the transitory nature of their inflationary episode,” Rouse and her co-authors wrote.
In the year since, the White House has become less confident in that comparison, with more contagious COVID strains continuing to cause disruptions and Russia’s invasion of Ukraine rattling food and energy markets.
“There were unforeseen events that intercede and fundamentally change the path of what inflation was,” the second senior White House official says, pointing — in addition to the war in Eastern Europe and successive Omicron variant waves in the United States — to China’s prolonged coronavirus lockdowns.
Still, the official maintained that inflation would dissipate within months, more or less in keeping with the postwar model Rouse alluded to in her 2021 analysis.
“The consensus view among external experts now is that, in fact, inflation will moderate over the course of the year,” the second senior White House official went on to say. “People disagree slightly about whether it will be x percent or y percent at year’s end, but everyone agrees that if you look at the underlying data in the economy, the projections are that it will start to come down.”
The administration has made similarly optimistic pronouncements in the past, only to be frustrated by reality. As Fox News was quick to remind its viewers this week, in December, Biden insisted that inflation had already peaked.
Seven months later, the unifying Democratic message is that, despite a run of bad luck, the White House is now treating inflation with unrelenting focus. “This president came into office facing a plague, then an insurrection, then a war. That's not presidential — that's Biblical,” Rep. Jake Auchincloss, D-Mass, told Yahoo News.
“I don’t think people are in a funk because of something Biden said or didn't say,” senior Brookings Institution economics fellow David Wessel told Yahoo News. But the reality is that Biden and the Democrats will pay for Americans’ discontent — this November, and in the 2024 presidential election — unless inflation abates.
The problem the White House is now trying to resolve has two sides, one economic and the other political. First, the Fed has to raise interest rates just enough to cool demand, but without discouraging consumers and businesses, which would lead to a recession.
At the same time, the White House has to convince the American public that it is doing everything it can to fight the problem, while pacifying progressives who want more government spending on the social problems — for example, student loans or the cost of child care — that Biden has promised to address.
“Both taking aggressive action to address inflation and communicating what we are doing are equally important,” the third White House official said.
But now that inflation remains stuck at its highest rate in some 40 years, some outside experts say messaging gimmicks aren’t likely to help Democrats in Congress. “It’s really hard for me to imagine any of this working out in the Democrats’ favor in November,” Wessel of Brookings says.
If the coronavirus was the enemy Biden expected, inflation was the one he and his top advisers never saw coming, despite warnings from economists like Larry Summers, former president of Harvard University. Summers cautioned that injecting too much money into the economy would cause it to overheat, and that once it did so, it would require a cooling-off that carried its own risks.
The White House dismissed concerns about its social spending programs, including the trillions of dollars devoted by Congress to coronavirus relief and infrastructure, as well as the stalled Build Back Better agenda.
The skyrocketing inflation since the plan’s passage, some say, appears to validate Summers' concerns. “There's very little economic heft in this White House," Wessel argues, comparing Biden’s economic team unfavorably to those of his Democratic predecessors. "It doesn’t seem like this president enjoys listening to economists and advisers argue about what is the best policy. That is hurting them. The decisions are not as orderly."
Treasury Secretary Janet Yellen, a former Fed chair, appears to have little direct influence on Biden, who tends to consult with longtime advisers. Her recent admission that she had been late to recognize the inflationary threat seemed to frustrate the White House.
(The White House challenged the notion that any friction exists between Yellen and the West Wing. “Secretary Yellen is a highly respected member of our administration,” a White House official who spoke to Yahoo News wrote in an email. “Whether in the Situation Room or with our global partners and allies, her gravitas, ability to understand the politics and tradeoffs of any issue, and experience maintaining financial stability during unstable times are highly valued by the president and our entire team.”)
Regardless of Yellen’s standing with Biden, the National Economic Council's chair, Brian Deese, is Biden’s top messenger on the economy, appearing regularly at White House press briefings. A longtime Democratic insider who has a law degree from Yale, he worked at the private investment giant BlackRock on its sustainable energy portfolio before joining the Biden administration in the face of progressive opposition.
“Brian Deese is a good guy, but he is not an economist," Wessel says.
Deese is now caught between the competing and and often contradictory imperatives of the Biden administration: inflation and strengthening the social safety net; high gas prices, but also transitioning away from carbon-burning fuels; providing billions of dollars in aid to Ukraine, while failing to convince Congress to allow for more domestic spending.
During the 2008 financial crash and recession, Deese, then 31, worked closely with Summers to stave off a broader economic collapse. But if the two saw eye to eye then, that is not the case today.
In January, Summers was asked about Deese’s assertion that “unsticking supply chains” would blunt rising prices in the months to come.
“No,” Summers flatly replied. “He’s wrong.”
Summers has recently been arguing that the only way to taming inflation is through painful austerity measures. “We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment, or five years of 6% unemployment, or one year of 10% unemployment,” Summers said in a speech last month in London.
As a political matter, austerity is a non-starter for the White House with the midterms looming. Instead, Biden has taken to browbeating oil companies into lowering costs and pleading with Saudi Arabia to increase oil production. He has attempted, without much success, to insist that record-setting gasoline prices that contribute significantly to the rate of inflation are a necessary, if unwelcome, byproduct of maintaining American leadership on the world stage and standing up to Russian aggression.
Yet as much as the White House has changed the way it talks about inflation, its ability to act is limited. “There's not a whole hell of a lot the administration can do at this point to lower the rate of inflation,” Wessel told Yahoo News.
The White House appears to agree, at least tacitly, with this assertion. Biden continues to search for a coherent message on gas prices, which are likely to come down somewhat once the peak summer travel season has passed. Meanwhile, his economic advisers continue to insist that inflation will ebb by the end of the year; the administration routinely notes that curbing inflation is primarily the responsibility of the Federal Reserve and its chairman, Jerome Powell.
The Fed has begun to raise interest rates and sell government bonds, in the process known as quantitative tightening. Critics say that Powell should have acted sooner, but the White House has been at pains to say that the president won’t threaten the Fed’s historic independence by telling Powell what to do.
“There’s actually a long history of various public and private pressure on the Fed,” the second senior White House official said, noting that presidents Richard Nixon and Ronald Reagan also tried to exert influence on monetary policy. “As for this president, he wanted to be extraordinarily clear that he respects the independence of the Federal Reserve.”
Clarifying the Fed's role has the added effect of reminding Americans that Biden can do little on his own. Not only on interest rates, but on energy and food costs that have been affected by shocks that, the administration argues, no economist could have predicted and fully prepared for.
June was devoted to more aggressive messaging from the White House, including a Wall Street Journal op-ed from the president. “The U.S. is in a better economic position than almost any other country,” the president wrote, pointing out that the U.S. economy could grow at a faster rate than China’s for the first time since 1976.
Publishing in the Journal was an indication that he wanted to take the fight directly to his detractors: The newspaper’s conservative editorial board has been a relentless critic of his fiscal policies. But so far, the president’s argument that the U.S. economy is weathering inflation relatively well has failed to persuade some experts and many voters.
“We believe the inflation situation in the U.S. was quite different than in other advanced economies,” Robin Brooks, chief economist at the Institute of International Finance, told Yahoo News in an email. “Core inflation in the U.S. rose to far higher levels, and the broadening out of inflation is also more pronounced,” he said, referring to price increases for goods other than food and energy.
The news earlier this month that the economy had added 372,000 jobs in June was a perfect illustration of the challenges the administration faces. White House economists were hoping for a somewhat smaller number to attenuate fears of inflation — but not a number so low as to expose the president to Republican attacks that his economic recovery had stalled.
Instead, employers continued to hire new workers. That could lead the Fed to raise interest rates again, a tapping of the brakes that always carries the danger of a recessionary skid.
And while the administration says that inflation levels will come down as the global economy adjusts to the shocks of disease and war, the president's advisers point to modest steps that they say can bring down prices, like a $45 billion investment in broadband Internet accessibility and a new bill, passed by Congress, that will increase scrutiny of the ocean shipping industry and potentially lead to a drop in the price of consumer goods.
In May, the president released a plan to lower housing costs, which have risen steeply and are a major contributor to inflation. But closing the estimated shortfall of 1.5 million housing units will take years.
The president has also pushed for a federal gas tax holiday, although Congress has not embraced the idea.
Aside from that, the White House says there is little that can be done except wait the inflationary period out, describing the current period as a “transition” from pandemic triage measures to a more stable post-pandemic economy.
The public, however, has little patience left. In Wednesday’s statement about the new inflation figures, Biden called on Congress to take action to lower prices, but otherwise offered nothing truly new.
“Inflation is our most pressing economic challenge,” he said, repeating what he had already said many times before.