The specter of inflation revolves around the $350 million U.S. spending bill debate

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The $3.5 trillion price tag on the Biden government’s budget plan has sparked a new debate in Washington about the possible inflationary impact of increasing public spending when consumer prices in the United States are rising. fast.

The U.S. Senate passed a Budget resolution This will form the basis of a comprehensive bill that will invest heavily in education, housing and climate-related initiatives, expand health insurance and strengthen the child tax credit program, among other expenditures.

The legislative blueprint includes a mechanism to offset spending by imposing higher taxes on American companies and wealthy Americans.It is in a Two parties $1 trillion in infrastructure bills, followed by the latest inflation report, which showed that prices stabilized at 13-year highs in July, despite milder monthly growth and substantial gains in some of the most epidemic-sensitive areas Decline in the sector.

With the two bills due to be submitted to the House of Representatives later this month, rising concerns about inflation may jeopardize Joe Biden’s spending ambitions. The House of Representatives, controlled by the Democratic Party, will end the summer recess early. It will first consider the budget resolution and then weigh the infrastructure plans. Both pieces of legislation must pass both houses of Congress.

“For the first time in at least 25 years that I have been following this, inflation has become a part of Congressional debate,” said Jason Furman, a senior fellow at the Peterson Institute for International Economics, who served as a U.S. economic adviser. US President Barack Obama and Bill Clinton.

Although the infrastructure bill passed the Senate with bipartisan support-19 Republicans including Senate Minority Leader Mitch McConnell voted for the legislation-but the Democrats chose to proceed with the budget process separately, using A convention called reconciliation to bypass the 60-vote Senate obstruction threshold. The budget resolution passed the upper house by a party vote on Wednesday. All 50 Democrats voted for the measure and 49 Republicans voted against it.

“Inflation will continue to be an important factor in the fiscal debate, and this debate will heat up as the Democrats flesh out their spending plans by mid-2022,” said Robert Kahn, global strategy and global macro director of consulting firm Eurasia Group .

“Progressive Democrats who advocate increased spending will be relieved to see that inflation may be close to a peak. Republicans will continue to fight back, pointing out that inflation is much higher than what consumers are accustomed to, and linking it to government policy.”

Republicans seeking to regain control of the House and Senate in next year’s midterm elections immediately seized the opportunity for headline inflation to increase by 5.4% year-on-year in July.

Republican lawmakers – including moderates like Lisa Murkowski and Mitt Romney who often vote with Democrats – cited the latest inflation data to explain their opposition to Biden’s budget.

The line chart of the US Consumer Price Index (YoY, %) shows that the pace of US inflation has stabilized at a 13-year high

Members of Biden’s party have also expressed concern, which indicates that an intra-party war may occur when the Democratic Party begins to flesh out a complete budget bill later this year.

Democratic Senator Joe Manchin from West Virginia said on Wednesday that “continue to spend more at a level more suitable for dealing with the Great Depression or the Great Recession, rather than an economy on the verge of overheating”, which is irresponsible. of. Last week he lobbied Fed Chairman Jay Powell about the Fed’s ultra-loose policy.

Democratic Senator Kyrsten Sinema from Arizona previously warned about the size of the budget bill. Earlier this month, she said that although she would not hinder the resolution framework, she wanted a smaller price tag.

Either Manchin or the cinema can maintain a budget in the Senate, and the Democrats control the Senate with the weakest advantage. The House of Lords split between Democrats and Republicans at a ratio of 50-50, and Vice President Kamala Harris was able to vote for a tie.

At the same time, in the House of Representatives, centrist Democrats also expressed concern about the size and scope of the budget bill, including several representatives including Josh Gottheimer of New Jersey and Jared Gordon of Maine. A letter was circulated earlier this month, saying that they were “a specific part of the budget resolution.”

They wrote: “These details are crucial, especially considering the combined threat of rising inflation, national debt and the recent trillions of dollars, and appropriately allocated to the Covid-19 emergency.”

U.S. CPI line chart excluding food and energy (monthly ratio, %) shows a slowdown in core consumer price increases

Biden firmly rejected these claims and pointed out that the price increase of “core” inflation slowed sharply this week, excluding unstable items such as food and energy, as well as items such as used cars and other travel-related expenses. The rise has contributed to a significant impact on the surge in inflation this year.

He also proposed that the investments included in the budget bill would help offset the rising costs of necessities such as housing, food and healthcare, and reiterated an argument. Layout Published this month by economists from the Council of Economic Advisors and the Office of Management and Budget.

The government’s position has won the support of many Wall Street economists and investors, who generally agree that the inflationary tensions associated with the new spending bill are exaggerated.

Market indicators of inflation expectations also reflect this outlook. The 10-year breakeven ratio is a common indicator of future inflation. It is derived from the price of inflation-protected government securities in the United States. It is currently stable at around 2.4% and reached a peak of nearly 2.6% in May.

“Most things inside [the bill] Tiffany Wilding, an American economist at Pimco, said that economic capacity should be improved so that inflation will not be triggered. “You may also see targeted measures create efficiencies that actually moderate inflation.”

Shawn Golhar, Barclays Director of Public Policy Research, added that the 10-year time frame of the plan also limits its direct economic impact.

“People add up all these numbers as if it happened in the first year,” he said.

Nonetheless, he predicts that tensions will intensify as the budget bill is enacted.

“This is an unstable moment,” Golhar said. “Everyone is trying to figure out what package you can put together and get unanimous support from the Democrats in the Senate and House of Representatives.”

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