'Paying the price': Biden and top aides misread threat of inflation as warning signs gathered

WASHINGTON – Treasury Secretary Janet Yellen tried 15 months ago to shut down some economists’ concerns that President Joe Biden’s $1.9 trillion economic relief package could fuel rising prices.

“Is there a risk of inflation?” Yellen said on ABC’s “This Week” in March 2021, three days after Biden signed the American Rescue Plan into law. “I think there’s a small risk. And I think it’s manageable.”

On Tuesday, as inflation is at a 40-year high, Yellen admitted on CNN, “I was wrong then about the path that inflation would take.” She said she hadn’t fully understood the impact of what she called “unanticipated and large shocks” to the economy and supply chain bottlenecks that boosted energy and food prices.

Yellen’s mea culpa was the most direct admission from the Biden administration that it failed to grasp the scale of inflation that would come as the country recovered from the coronavirus pandemic.

Even as the cost of gas, food and other consumer goods soared, the administration repeatedly assured Americans the price increases would be temporary.

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Economists who sounded the alarm about rising inflation said the warning signs were there all along.

“The most reasonable reading of the evidence back then was that we were going to have an inflation problem if (the economic package) passed,” said Michael Strain, an economist at the American Enterprise Institute, a think tank in Washington. “I think the Fed and the administration were both much too dismissive of that possibility.”

Steven Rattner, economic adviser for President Barack Obama, said much of the blame for inflation falls on Biden’s American Rescue Plan, which gave many Americans $1,400 checks, unleashed a host of social programs and pumped $350 billion into local and state governments.

“We’re all paying the price for having overstimulated this economy during the pandemic and putting too much money into people’s pockets, which created a lot of this inflation,” Rattner said Wednesday on MSNBC’s “Morning Joe.” “There’s no free lunch here. Now we’re all going to have to pay the price.”

“This problem,” Rattner said, “was to a considerable degree self-inflicted, both by our fiscal policy, the stimulus as well as by the Federal Reserve.”

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What's driving inflation?

Inflation soared to a 40-year high in March amid surges in gasoline, food and rent costs. The consumer price index leaped 8.5% annually, the fastest pace since December 1981. Inflation eased off slightly in April, down to 8.3%, but core consumer prices, which exclude volatile food and energy items, increased 0.6% from the prior month, more sharply than expected.

High inflation is expected to persist into next year, according to a report released late last month by the nonpartisan Congressional Budget Office. The agency expects the consumer price index to rise 6.1% this year and 3.1% in 2023. The forecast projects that inflation will drop from the current 8.3% but remain higher than a long-term baseline of 2.3%.

Most economists blame the increase on multiple factors, including the supply chain breakdowns, labor shortages, Russian President Vladimir Putin’s war against Ukraine and a sudden burst of spending after widespread lockdowns during the COVID-19 pandemic.

Some point the finger at Biden’s American Rescue Plan, a stimulus program that was intended to speed up the recovery from the economic and health impacts of COVID-19.

Harvard economist Larry Summers, who served as Treasury secretary under President Bill Clinton, was one of the first to raise concerns. The American Rescue Plan could “set off inflationary pressures of a kind we have not seen in a generation,” Summers wrote in a column for The Washington Post on Feb. 4, 2021, a month before Biden signed the bill into law.

James Knightley, chief international economist at ING, pointed to $5 trillion in combined stimulus from COVID-19 relief packages in 2020 and 2021 under Biden and his predecessor, Donald Trump, that boosted demand as supply slowed during the pandemic. He said that combination “invariably” meant prices would get higher.

There was “reluctance” among Biden administration officials to acknowledge the threat, he said, because they were determined to take major action to combat the dire situation posed by the pandemic. Biden said in February 2021 that “the biggest risk is not going too big” but rather “too small” as he pushed Congress to pass the sweeping American Rescue Plan.

“When we look back, there was a huge amount of cash that hit the economy when the economy didn’t have the capacity to deal with that cash stimulus,” Knightley said, arguing that a second round of stimulus checks passed by Biden probably wasn’t needed. “They didn’t need to do as much for so long, especially given the supply strains that are still happening today.”

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‘We were clearly unprepared’

Administration officials routinely brushed aside warnings of high inflation. Yellen said on May 4, 2021, that she didn’t expect there to be “an inflationary problem.” The next month, she acknowledged that inflation could be higher than expected – maybe about 3%, she said.

The Biden administration played down the risk of inflation for weeks. As the price of groceries, gas and rent climbed, Biden predicted in July that inflation would be “temporary.” By October, Biden acknowledged the toll on the American people, saying during an event at the Port of Baltimore that high prices were “worrisome” and “one of the most pressing economic concerns.”

Yet officials continued to push the narrative that inflation would not persist. White House press secretary Jen Psaki said in March that inflation would be “temporary and not lasting.”

Even now, as Biden calls inflation his top priority, the White House rejects the argument that the American Rescue Plan is to blame. Gene Sperling, the White House’s American Rescue Plan coordinator and senior adviser to Biden, noted Wednesday that the spike in consumer prices is a global trend not unique to the USA.

“Some have a curious obsession with exaggerating impact of the Rescue Plan while ignoring the degree high inflation is global, has been impacted by variants that impeded supply corrections and exacerbated by major energy hikes due to Putin aggression,” Sperling wrote on Twitter.

Some other economists agree.

The biggest drivers of inflation have been COVID-19 and the war in Ukraine, said Dean Baker, senior economist at the Center for Economic and Policy Research, a Washington-based think tank.

Baker disagrees with those who argue the administration missed the warning signs. What the administration can be blamed for, he said, is not being ready for last year’s wave of COVID-19 infections caused by the delta and omicron variants, which further constrained the economy.

“We clearly were unprepared,” Baker said.

Mark Zandi, chief economist of Moody's Analytics, said Yellen, other administration officials and his own analysis failed last spring to foresee the scale of inflation to come because they assumed the pandemic was largely over.

On July 4, Biden declared “independence” from the COVID-19 virus, only to see cases skyrocket again in the USA – and globally. Global supply chains were scrambled because manufacturing plants in Asia abruptly shut down.

Yellen “was wrong because she was wrong about the pandemic,” Zandi said. “The pandemic was not over. And certainly, the economic damage caused by the pandemic was not over.”

Zandi disputed assertions that Biden’s American Rescue Plan accelerated inflation, noting that inflation in the United Kingdom and Canada is higher than in the USA. He said the main drivers of the higher inflation – spikes in oil, food, vehicle and housing prices – can be traced to supply issues, not demand. He said U.S. consumer spending matches normal, pre-pandemic levels.

“I think the American Rescue Plan has had little to no effect on current inflation,” he said, attributing it to pandemic supply chain issues and Russia’s invasion of Ukraine that pushed up energy costs. “There’s no link back to the ARP.”

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How can Biden tame inflation?

Multiple polls show inflation is the top concern for an overwhelming majority of Americans, an ominous sign for Democrats heading into this fall’s midterm elections. Biden and Democrats face major headwinds to maintain control of Congress in November as a result of rising prices making many consumers anxious.

Analysts said there’s not much Biden can do to bring down prices immediately. His attempts – oil releases from the strategic reserve, improving port operations and calls to investigate price gouging – have failed to get inflation under control.

Biden acknowledged this week that his options are limited. “The idea we’re going to be able to click a switch, bring down the cost of gasoline, is not likely in the near term,” he said. “Nor is it with regard to food.”

One option that Biden hasn’t tried would be to lower or remove tariffs that President Trump imposed on Chinese goods. Trump slapped tariffs of up to 25% on billions of dollars’ worth of Chinese imports as part of a trade war with Beijing.

Groups such as the U.S. Chamber of Commerce and the National Retail Federation called on Biden to ease the tariffs, arguing that the duties are a major factor pushing up prices for consumers.

The Treasury Department said this week it is considering cutting some of the tariffs but any reductions would have to be weighed against the goal of holding China accountable for unfair competition.

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Plotting strategy

As concerns mount, Biden held an inflation-fighting strategy session with Federal Reserve Chairman Jerome Powell at the White House on Tuesday. The central bank raised its key short-term interest rate by a quarter-percentage point in March and said more hikes are planned for this summer and later this year.

Some on Wall Street fear that monetary steps to fight inflation could cool down the economy so severely that they would reverse gains in job growth and wages over the past year. They worry about inflation turning into a recession.

“It’s a hurricane,” JP Morgan CEO Jamie Dimon said Wednesday. “Right now, it's kind of sunny, things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy or Andrew or something like that. You better brace yourself.”

The White House, which is embarking on a monthlong campaign to highlight efforts aimed at curbing inflation, sought to assuage such fears. Biden said he won’t interfere in the Fed’s efforts as some presidents have tried.

“My plan to address inflation starts with simple proposition: Respect the Fed, respect the Fed’s independence,” he said.

Brian Deese, director of Biden's National Economic Council, argued the United States is "uniquely well positioned" so that steps targeting inflation won't come at the expense of newly added jobs. The unemployment rate fell to 3.6% in April.

"We can actually take on inflation without having to sacrifice all of those gains," he said this week.

Knight predicted that supply chain strains, Russia’s war in Ukraine and the difficulty of companies to fill job vacancies mean inflation might not stabilize until 2023.

“Inflation is going to be sticky,” he said. “It’s going to be pretty slow to fall, I think.”

Michael Collins and Joey Garrison cover the White House. Follow Collins on Twitter @mcollinsNEWS and Garrison @joeygarrison.

Contributing: Paul Davidson, USA TODAY, and The Associated Press

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This article originally appeared on USA TODAY: Inflation: White House says it misread risk. But there were warnings.