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      What is happening with inflation in the US, and how worried should you be?

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      What is happening with inflation in the US, and how worried should you be?Why prices are rising, how long this might last, and why inflation is a psychological as well as an economic phenomenon Jobs are coming back, wages are rising, stock markets are hitting record highs. In many ways, the US economy is booming. And yet as we officially enter the holiday season, consumer confidence is at its lowest level in a decade. The reason? Inflation.The US inflation rate in October was the highest it has been since the early 90s, when Nirvana released Smells Like Teen Spirit and the Gulf war was just beginning.But should we really be worried? The Federal Reserve, and the Biden administration, think rising prices are “transitory” – caused by the hangover from the pandemic. Their critics are less sure.Inflation, especially during a global pandemic, is complicated. Here is what we know about inflation in the US.What is inflation?Inflation describes a general rise in the level of prices of all consumer goods and services. It is not specific to a particular good or service; rather it is a measure of when, broadly, things are more expensive than they were before.There are a handful of ways inflation is measured, though the Consumer Price Index (CPI) measured by the US Bureau of Labor Statistics is the most common system used to gauge inflation. The index looks at the prices of goods and services in cities and suburbs across the country, weighted depending on the proportion a good or service has in overall consumption. For example, food and housing is weighted more than clothing in the index.What’s happening with inflation?According to CPI numbers released in mid-November, prices in the US rose 6.2% in October compared with where prices were the same time last year. US core inflation, which does not include goods like energy and food whose supply is susceptible to external events, was 4.6% in October, its highest since 1991.Prices broadly increased in energy, housing, food, used and new vehicles and recreation. Price decreases for airline fares and alcoholic beverages were among the few price declines seen last month.The US is not the only country experiencing inflation – the UK, China and Germany have all also reported rising inflation in the last few weeks.The Fed has already taken steps to reduce inflation, ending some of its stimulus programs that saw it buying bonds to stimulate the economy. But the central bank has held off on its main tool to control inflation – adjusting interest rates – probably because doing so runs a higher risk of starting an economic recession.How worried should Americans be about inflation?Some economists have been pointing out that the inflation we are seeing now is just one piece of the pandemic’s impact on the economy, which overall has not been terrible.“There’s a lot of uncertainty. We don’t know what happens next. The past two years have been unprecedented and painful,” said Claudia Sahm, a senior fellow at the Jain Family Institute and a former Federal Reserve economist. “We’re going to have a bumpy ride.”Even though inflation was high in October, other figures like the strong increase in jobs and the surge in retail sales point to an overall good month for the US economy.“My baseline scenario is that as the pandemic is contained, which is happening as we get more vaccines out there, we will see inflation move back down to something that is very close to before Covid,” Sahm said. “I don’t think Covid has changed the underlying structure of the US economy.“I do take a lot of comfort that many people have the money to weather this storm, at least for now,” she said, citing the direct aid Americans got through stimulus checks and the child tax credit. “It really is upsetting to pay more for your groceries, but it’s really upsetting not to be able to walk home with the groceries in your cart.”Why is inflation happening?The pandemic has touched every inch of the US economy and has affected every American in some form, so there is no single reason inflation is happening.“When you look under the hood of the top-line numbers, there are a lot of stories,” Sahm said.The supply chain crisis has led to a shortage of cars, clogged shipping ports and overstuffed warehouses. Meanwhile, consumer demand has surged after plummeting in the early days of the pandemic.For example, a shortage of microchips has led to a slowdown in car manufacturing, which increased the sales – and ultimately prices – of used cars, Sahm said. Housing prices have gone up because renters feel comfortable moving again and rental owners feel comfortable charging higher rents.Some companies have not been hesitant to reap the benefits of increased consumer spending during the pandemic, raising prices and paying record compensation for the country’s top chief executives.Throughout the pandemic, the federal government boosted the economy through multiple trillion-dollar stimulus packages that gave money directly to families and employers, and the Federal Reserve policy lowered the interest rates and purchased bonds.What are the effects of inflation?The most obvious impact is that Americans are seeing higher prices whenever they go to the store, make investments in a house or car or pay their medical expenses. Some economists believe that the higher prices mean that some households will start slowing their spending as goods take up a larger portion of their budget.Inflation’s impact on people’s budgets will depend on whether wages can keep up with the rate of inflation. So far, it seems that wages are not keeping up with inflation, though industries that are recovering from severe pandemic losses, like hospitality, are seeing wage increases on pace with inflation.Inflation can also have a profound impact on politics as voters tend to blame the party in power for rising prices. So far, Republicans have been eager to blame Joe Biden for inflation, condemning him for overspending on government aid.“It’s a direct result of flooding the country with money,” the Senate minority leader, Mitch McConnell, told reporters in October.Democrats have taken the defensive, emphasizing that experts at the Federal Reserve believe the inflation will be short-lived and that pandemic assistance was necessary for the health and wellbeing of Americans during a crisis.“We are making progress on our recovery. Jobs are up, wages are up, home values are up, personal debt is down and unemployment is down,” Biden said the day October’s inflation numbers were released. “There is no question the economy continues to recover and is in much better shape today than it was a year ago.”How will it end?That’s the big question. Earlier this month the Fed chair, Jerome Powell, conceded that inflation had been “longer lasting than anticipated” and it was “very difficult to predict the persistence of supply constraints or their effects on inflation”. Economists expect the central bank to start raising rates next year in an attempt to tamp down price rises.But inflation is a psychological as well as an economic phenomenon. Fear of rising prices is already affecting consumers and could, perversely, lead to more price rises as consumers snap up goods fearing yet more rises in a market that is still constrained by supply chain problems.We will probably continue to be haunted by inflationary fears unless the price hikes do prove “transitory”. As the old economist joke goes: the best rate of inflation is the one no one notices.TopicsInflationEconomicsUS politicsnewsReuse this content More

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      Democrats worry inflation could imperil agenda and congressional majorities

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      Democrats worry inflation could imperil agenda and congressional majoritiesRepublicans blame Biden’s spending packages but supporters argue Build Back Better will help Americans pay their bills As recently as this summer, Joe Biden seemed to be taking a “keep calm and carry on” approach when it came to concerns about rising inflation.“As our economy has come roaring back, we’ve seen some price increases,” the US president said in July. “Our experts believe and the data shows that most of the price increases we’ve seen were expected and expected to be temporary.”But now, with inflation hitting a 30-year high last month, Biden’s tone has become noticeably less upbeat.“Everything from a gallon of gas to a loaf of bread costs more,” Biden said in Baltimore earlier this month. “We still face challenges, and we have to tackle them. We have to tackle them head on.”Americans are taking notice of high prices with growing alarm, and their concerns appear to be negatively affecting Biden’s approval rating, which had already been falling in recent months. As the US experiences sticker shock at the gas pump and in grocery stores, Democrats are worried that inflation could imperil their legislative agenda and their majorities in Congress as crucial midterm elections loom next year.While the president and fellow Democrats had previously sought to downplay rising inflation, it has become an unavoidable issue as prices continue to climb. The labor department has reported that prices increased by 6.2% over the past 12 months, marking the most rapid uptick since 1990. Gasoline prices have increased by 49.6% over the past year, while food prices have risen by 5.3%.As prices rise, more working Americans are noticing their bills have become more burdensome. According to a poll conducted by the progressive firm Navigator Research this month, 54% of Americans now say the cost of groceries and gas is a “major crisis”, marking a 17-point increase since September.Republicans have blamed the price increases on Biden’s economic policies, arguing that rising inflation underscores the need to oust Democratic lawmakers in the midterm elections next year.“As Biden and Democrats continue to push for trillions more in reckless spending and higher taxes, skyrocketing prices and a broken supply chain under Biden are crushing American families, workers and small businesses,” said Emma Vaughn, a spokesperson for the Republican National Committee. “Americans will soundly reject Biden’s failed economic agenda at the ballot box in 2022.”There are some early signs that Republicans’ message is striking a chord with voters, as the party looks to take back control of Congress in 2022.An AP VoteCast survey showed that 35% of Virginia voters named the economy and jobs as the most important issue facing the state, making it the most common response. Those voters were more likely to support the Republican gubernatorial candidate Glenn Youngkin, who defeated Democrat Terry McAuliffe by two points in the election held earlier this month.And it’s not just Republicans who are sounding the alarm about price hikes. Senator Joe Manchin, one of the key holdouts in Democrats’ negotiations over their $1.75tn spending package, has said he is hearing more from constituents who are concerned about their gas and grocery bills.“By all accounts, the threat posed by record inflation to the American people is not ‘transitory’ and is instead getting worse,” Manchin said in response to the labor department’s latest report. “From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day.”Manchin has previously expressed concern that Democrats’ spending package, known as the Build Back Better Act, could negatively contribute to inflation. In a September op-ed for the Wall Street Journal, Manchin warned against approving more government spending, saying, “An overheating economy has imposed a costly ‘inflation tax’ on every middle- and working-class American.”The Biden administration has sought to mitigate inflation-related concerns about the bill, which passed the House on Friday. The president has repeatedly touted a letter from 17 Nobel laureates in economics, which argued the spending package would “ease longer-term inflationary pressures”.But the bill’s critics say the legislation would not address the inflation happening now and may even cause prices to rise further, urging members of Congress not to approve another large spending package.“We’re not worried about the long-term. We have inflation in the here and now, and this policy will make it worse in the foreseeable future,” said Curtis Dubay, a senior economist at the US Chamber of Commerce, a pro-business lobbying group that opposes the spending package.“The first rule of being in a hole is to stop digging,” Dubay added. “This would keep digging. So they need to not pass it.”Jason Furman, who served as the chair of the White House council of economic advisers under Barack Obama, rejected that argument. “Build Back Better will have a negligible impact on inflation over the medium term,” Furman said. “In gross terms, the total spending is one-tenth as much per year as what we just did this year [with the coronavirus relief package]. Moreover, that spending is paid for.”For progressives, conservatives’ warnings about inflation seem a convenient excuse to quash a bill that they already opposed.Natalia Salgado, the director of federal affairs for the progressive Working Families party, said the legislation would actually help average Americans deal with rising inflation by lowering their healthcare and childcare costs.For example, the Build Back Better Act would establish universal prekindergarten for all three- and four-year-old children. It would also reduce Affordable Care Act premiums and lower drug prices by allowing Medicare to negotiate with pharmaceutical companies.“If we really want to have a discussion about inflation, let’s talk about the many things that this bill is going to help minimize the cost of,” Salgado said. “Folks coming out of this pandemic were already hurting economically. It is economically imperative to pass the Build Back Better legislation.”Democrats in Congress have echoed that message, urging those who are worried about inflation to support the bill.“House Democrats’ infrastructure deal and Build Back Better Act tackle inflation head on through their historic investments,” said Congressman Sean Patrick Maloney, the chair of the Democratic Congressional Campaign Committee. “Rather than working to solve economic problems, Republicans have voted overwhelmingly to block these bills that reduce prices for the American people and focused instead on their own extremist agenda.”But many of the provisions of the Build Back Better bill will not go into effect immediately. The Medicare drug price negotiations will not begin until 2025, and the universal prekindergarten program will be built up over the next few years.In the short term, it may be difficult for Biden to address rising prices. Even if the Federal Reserve moves quickly to stifle inflation, it would take months for Americans to feel the effect of the fiscal policy change. And when it comes to gas prices specifically, Biden has little sway over the global oil market, although he has called on the Federal Trade Commission to investigate “mounting evidence of anti-consumer behavior by oil and gas companies”.“Politically, people are very sensitive to inflation in gasoline prices and food because that’s just a visible item they see,” Furman said. “I’ve been in government when gas prices are going up, and it’s terrible. Everyone hates you.”On the plus side for Democrats, the frequent fluctuations in gas and food prices mean those costs could decrease over the next year even if overall inflation continues to rise, Furman said.That possibility may be Democrats’ best hope for maintaining control of Congress after the 2022 elections. However, if prices do not improve over the coming year, the president’s party may need to brace for an ugly election night next November.TopicsUS economyInflationDemocratsUS politicsanalysisReuse this content More

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      AstraZeneca’s boss is a boardroom superstar but a potential £2m cherry is pushing the point

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      A majority is a majority, but a rebellion of 40% against an executive pay policy is too large to be pinned solely on those brain-dead fund managers who outsource their thinking to proxy voting agencies.At AstraZeneca some serious institutions, with Aviva Investors and Standard Life Aberdeen to the fore, clearly thought the company was pushing things too far by adding a potential £2m cherry on top of their chief executive, Pascal Soriot’s, already substantial pay package. The rebels had a point.Yes, Soriot is a boardroom superstar thanks to AstraZeneca’s success in supercharging the development and production of the Oxford University vaccine for no profit. Communication with regulators went awry at times, and Soriot himself obviously wasn’t getting his hands dirty in the labs. But the boss, even when operating from Australia, is doing an excellent job of standing up to irritating and ungrateful EU commissioners, which is also part of the pandemic operation. And, amid it all, the company didn’t miss a beat on its day job and had time to spend $39bn buying the rare disease specialist Alexion, which looks a promising deal.Yet exceptional effort in an exceptional year is roughly what one expects from a chief executive on Soriot’s pay package. In the last three years, his incentives have performed wonderfully and he has earned £13m, £15m and £15m, so is firmly established in the £1m-a-month category, which very few chief executives of FTSE 100 companies can say. Even for an international hero, it feels a decent whack.The company’s claim was that “the world drastically changed in the last 12 months, and so did AstraZeneca”, and thus adjustments should be made outside the normal three-yearly cycle for tweaking pay.That argument would have felt stronger if AstraZeneca was not already at the adventurous end by UK standards. Last year, Soriot earned 197 times the median pay among his workforce. And, critically, the new arrangement will take his variable pay – annual bonus plus long-term incentives – to 900% of his £1.33m salary. A few years ago 500% was regarded as high by FTSE 100 standards.That precedent-setting detail helps to explain why the rebellion was so strong. Those fund managers who care about controlling boardroom pay inflation saw the risk of knock-on effects elsewhere. Loyalty to Soriot probably swayed a few doubters and helped AstraZeneca prevail, but the company did not need to pick a fight at this time – it gave Soriot a chunky rise a year ago.Some real pay shockers (think Cineworld) have slipped through in recent months. If the wider message in the AstraZeneca vote is that fund managers are not all asleep, that would be no bad thing.Seatbelts on for more stock market turbulenceLast Friday investors preferred to see a silver lining in a weak set of US unemployment numbers – only 266,000 jobs created in the month of April, against forecasts of 1m. If a lack of new jobs implied no inflationary wage pressures in the US economy, at least the stock market could take a few days off from worrying about rises in interest rates, ran the theory.Inflationary pressures, though, come in many forms, and here is a piece of data that spooked the stock market on Tuesday: China’s producer prices index rose at an annual rate of 6.8% in April, up from 4.4% in March.That is the highest level for three years and a sign, probably, that the boom in prices of raw copper, iron ore and other raw materials is finally feeding through to goods. The FTSE 100 index fell 175 points, or 2.5%, following other stock markets down.The benign view says a flurry of higher prices is almost to be expected as the global economy reopens. In that case, central banks’ mistake would be to move too early and choke off recovery. Yet it is clearly also possible that we could be at the start of a big move on prices, with the next leg delivered by the Biden’s administration’s huge infrastructure programme. If so, the mistake would be to delay rate rises.Do not expect quick or clear answers. Inflation data can give mixed messages for months. Do, though, anticipate more bumpy days for stock markets. Investors’ default assumption is to assume the US Federal Reserve will play nicely and look through the short-term signals. Life could quickly get ugly if there is any deviation from that assumed path. More