Senate Democrats are currently drafting the human infrastructure package that they hope to ram through via budget reconciliation, a process that would allow them to pass the legislation with a simple majority rather than the 60 votes needed to avoid a Republican filibuster. Economists are sharply divided over whether President Biden’s $3.5 trillion infrastructure package will exacerbate inflation pressures that are already the most severe in decades.
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The $3.5 trillion in spending would add to the almost $6 trillion that has already been approved to support the economy through the COVID-19 pandemic. The package potentially will be paid for with tax increases on corporations and wealthy Americans.
“Government spending doesn’t stimulate the economy, it de-stimulates the economy and causes inflation,” said Stephen Moore, an economist at FreedomWorks who served as an economic adviser to former President Donald Trump. “We should be aggressively cutting government spending right now, not raising it.”
Core personal consumption expenditures, the Federal Reserve’s preferred inflation measure, rose 3.4% annually in May, the fastest since April 1992. Prices were up 0.5% on a monthly basis.
The annual reading has been skewed by “base effects” that were a result of prices falling at the onset of the pandemic.
The Federal Reserve, which will hold its July meeting on Wednesday, has called the price increases temporary, saying prices will at some point fall as supply chain issues caused by COVID-19 are resolved. Fed Chairman Jerome Powell has pointed to the price of lumber, which is now down 62% from its May 7 high, as evidence.
Ticker Security Last Change Change % KMB KIMBERLY-CLARK CORP. 135.66 +0.71 +0.53%WHR WHIRLPOOL CORP. 219.52 +4.84 +2.25%PEP PEPSICO, INC. 157.18 +1.99 +1.28%
However, inflation pressures have already caused a number of U.S. companies, including Kimberly-Clark. Corp., Whirlpool Corp. and PepsiCo Inc. to raise prices.
Those companies expect to see inflation pressures last at least into year-end, if not longer.
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“The expectations are that the commodities will reach peak in the third quarter and then start to ease a bit as we get into the fourth quarter,” Kimberly-Clark CFO Maria Henry said on the company’s second-quarter conference call on Friday.
Whirlpool CEO Marc Bitzer was a bit more cautious, warning “there will be a carryover of inflation to next year” if the current trend persists.
Biden, speaking at a CNN Town Hall on Wednesday, referenced a Moody’s Analytics report as evidence that his spending plans will “reduce inflation.”
A report authored by Mark Zandi, chief economist at Moody’s Analytics, said worries that Biden’s $3.5 trillion spending plan will ignite “undesirably high inflation” are “overdone.”
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Zandi told FOX Business there are three reasons inflation fears are misplaced.
Secondly, the package would raise productivity growth and labor force growth, particularly among lower-income workers due to child care, paid family leave and elder care benefits, leading to stronger underlying growth that will “take the edge off inflation.”
First, there is still slack in the economy and that labor force participation is still low.
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