Published February 17, 2011
President Obama must know that he’s playing with fire. Already under the gun for failing to address our nation’s jobs crisis, he will soon be slammed for bringing on inflation. If he thinks the crowds in Tahrir Square were rowdy, wait till the Tea Party members see their fixed incomes shattered by higher prices. Some of us have seen this picture before, during the brief and unlamented presidency of Jimmy Carter. It did not end well – for the country, or for Carter.
Rightly or wrongly, the administration’s loose money policies will be blamed for inflation that will, in fact, have many sources. The inexorable growth of populations and living standards in Asia, the newfound investor interest in commodities, poor crop yields – all of these factors have boosted prices for foods and materials around the world. In the U.S., rising costs have been masked by our excess of housing and by the government’s efforts to squash interest rates. Also, companies recovering from the financial crisis have enjoyed soaring productivity, which has postponed the need to pass along rising costs. High levels of unemployment mean that companies do not face any imminent surge in labor costs.
Many companies have resisted boosting prices just as demand began to recover. Starbucks, for instance, got creamed in the downturn, as customers decided that the price of their favorite macchiato was just too darned high. Though coffee prices have soared to near-record levels, the company, like many others, put off passing along the increase. That moment has passed; greater numbers of consumer goods companies are now warning of impending price hikes. Whirlpool, Victoria’s Secret, Hanes and Kraft are just a few of the better-known brands that have signaled higher price tags. American Airlines, General Mills, J.M. Smucker and McDonald’s are also in the mix.
Adding to the upward pressure are rising import costs. In January, prices on goods brought into the U.S. increased 1.5% from the month earlier, in part because of higher oil prices. Even without the fuel hike, prices were 1.1% higher than in December, and up 3.2% compared to a year ago.
Consumer price reports remain low, but that will almost certainly change. As a result, the Federal Reserve will be under increasing pressure to raise interest rates. This will be politically difficult for the Fed, since any rise in rates will provoke an upward revision in projected budget deficits – another sore point for the administration. Among the many overly optimistic aspects of President Obama’s just-released new budget projections is the assumption concerning interest payments. Even projecting, as they do, that rates will not spiral upward in tandem with our national debt, the budget forecasts interest costs reaching $928 billion in 2021, up from $205 billion currently. In 2017, interest expense of $661 billion will top defense expenditures; imagine that.
The Federal Reserve is in a tight spot. On the one hand, Chairman Ben Bernanke warns continually of our spiraling deficits. On the other hand, his most potent anti-inflation tool – raising rates – is only going to make our fiscal outlook worse. Also, the government wants desperately to boost the ailing housing market. Unfortunately, with mortgage rates already above 5%, a full point above last October’s lows, mortgage application activity has already taken a hit.
Tea Partiers are already surly about government spending, knowing that our giant deficits have weakened the country’s prospects. Wait till they find out that their Social Security checks don’t buy quite as much at the local grocery. The shellacking handed out in the November elections may look like a caress compared to how they may punish the president come 2012.
Liz Peek is a columnist for Fox News and for TheFiscalTimes.com