"Inflation Is Certain, Only the Tightening Period Remains"... Will Biden's Infrastructure Plan Also Face Setbacks?

April US Consumer Price Index Hits Highest in 12 Years
Investment Experts "Inflation Is Certain" VS BofA "Only a Temporary Phenomenon"
Biden's Infrastructure Plan May Face Setbacks

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Suhwan] Last month, the U.S. Consumer Price Index (CPI) surged by 4.2% compared to the same period last year, marking the highest level in 12 years and intensifying inflation concerns. As a result, voices calling for the Federal Reserve (Fed), which has been conducting large-scale quantitative easing since the COVID-19 pandemic, to shift to tightening are growing louder. These inflation worries have also increased the likelihood of setbacks to President Joe Biden's proposed tax hikes and infrastructure development plans.

"Inflation is almost certain"... Counterarguments that it is a temporary phenomenon

Bank of America described the April CPI index released on the 12th (local time) as a "very surprising figure," highlighting emerging signs of inflation. Consequently, experts are urging the Fed to expedite the implementation of tightening policies. Sophie Griffiths, an analyst at Oanda Markets, said in an interview with Forbes on the same day, "The fear that the government's massive fiscal stimulus combined with the economic reopening will trigger rapid inflation is spreading throughout the market."

Ultimately, it is considered only a matter of time before the Fed switches to tightening. The timing of the tightening transition is more important than whether tightening will occur. Chris Zaccarelli, an investment advisor, said, "Whether inflation will come or not is no longer important. Inflation is almost certain," adding, "The key is for the Fed to switch to tightening at the right time." He also warned, "If the Fed acts timely, inflation will not rise as much as expected. However, if the Fed misses the timing, price increases exceeding the Fed's 2% inflation target will occur."

There is an interpretation that if the Fed, which is drawing a line against tightening and promoting optimism, misses the timing of the tightening shift, the damage will be greater. Muhammad El-Erian, Chief Economic Advisor at Allianz Germany, pointed out, "If the Fed maintains its current assessment of prices, there is a risk of policy failure and market turmoil."

If the Fed delays its tightening transition and inflation and tapering (reduction of asset purchases) occur simultaneously, the U.S. government's plan to drive economic recovery after the COVID-19 pandemic is also likely to be hampered. Stanley Druckenmiller, chairman of Duquesne Family Office and a legend in the U.S. hedge fund industry, said, "The Fed's interest rate hikes will make it impossible to manage the government's debt accumulated through massive fiscal spending."

However, contrary to some experts' concerns, there is also a view that inflation will not be prolonged. Bank of America emphasized, "The rise in consumer prices last month is a temporary phenomenon," adding, "It does not necessarily mean prolonged inflation." Similar to the Fed's analysis, this interpretation suggests that temporary inflation occurred due to a rebound in consumer sentiment, such as pent-up demand, ahead of the economic reopening.

Biden's large-scale infrastructure plan may face setbacks

President Joe Biden [Image source=EPA Yonhap News]

Amid discussions about the possibility of stagflation, which combines inflation and economic stagnation, the $2.3 trillion infrastructure development plan promoted by the Biden administration is increasingly at risk of setbacks. Bloomberg News reported, "The Republican Party is already attacking the Biden administration by referring to the stagflation that occurred during former President Jimmy Carter's era," adding, "Especially with the CPI figures released today, skeptical voices about President Biden's large-scale fiscal stimulus plan may emerge even within the ruling party."

In fact, the Republican leadership expressed during a meeting with President Biden that they cannot accept the repeal of the tax cuts implemented since 2017, proposed by the Democrats. Biden and the Democrats' proposed tax hike plan includes raising the corporate tax rate, which former President Donald Trump lowered to 21%, back up to 28%. Senate Republican Leader Mitch McConnell opposed, saying, "Tax increases, including the repeal of the tax cuts, are a red line we absolutely cannot accept."

Instead, the Republicans proposed reducing state government support budgets and reallocating those funds to infrastructure development. Earlier this year, the $1.9 trillion economic development budget that passed included $350 billion in state government support. Additionally, the Republicans stated they could only accept up to $800 billion for infrastructure development, significantly less than the Biden administration's original plan.

Furthermore, the April new employment figures released on the 7th, which were only 260,000?one-quarter of market expectations?also put President Biden's economic policies under scrutiny. The Wall Street Journal (WSJ) pointed out, "The Biden administration significantly increased unemployment benefits as a recovery measure, making them comparable to the average wage of $16 per hour earned by hotel and restaurant workers," arguing that excessive unemployment benefits discouraged active job seeking, resulting in poor employment figures. WSJ also noted concerns that companies are forced to raise wages to hire employees, which could lead to further price increases.

This content was produced with the assistance of AI translation services.