Inflation and Politics, a Toxic Mix

by Greg Valliere, AGF Management Ltd.

WE’RE OLD ENOUGH TO REMEMBER the 1970s, when the economy — and politicians — were clobbered by inflation. It’s something consumers understand because the evidence of higher prices is apparent every day, and now it’s a growing threat to incumbents.

POLLTAKERS WILL TELL YOU that the three signs of inflation that most worry consumers are the red-hot housing market, higher gasoline prices, and rising food prices, especially for meat, which is in short supply and increasingly expensive.

ECONOMISTS WILL TELL YOU that gasoline and food prices are “transitory,” but consumers simply see higher prices, and they want wage hikes. Many companies — led by Bank of America, with its $25 minimum wage — are complying; some firms are offering sign-up bonuses.

MANY REPUBLICANS ALSO REMEMBER THE 1970s, and the damage that inflation inflicted on President Jimmy Carter. So Republicans see a juicy issue for the 2022 elections — inflation, which they blame on a spending binge by Joe Biden.

NO ONE EVER CLAIMED that politics is fair; blaming Biden for inflation seems like a stretch, with the economy emerging from a pandemic in un-charted waters. It will take months for the economy to return to normal, so inflationary pressure is inevitable this summer in a wide range of commodities — from corn to lumber to copper.

IS IT BIDEN’S FAULT that semiconductor chips are in short supply? The world’s major producer, Taiwan, is suffering from an epic drought, and the manufacture of chips depends on ample supplies of water.

BUT BIDEN AND THE DEMOCRATS are vulnerable to charges that their spending binge has heated up inflation, particularly in the labor market. Gasoline and meat prices eventually will decline, but there’s a dire shortage of workers to deliver those products.

THE LONG KNIVES WERE OUT this spring for the former Treasury Secretary, Larry Summers, who is warning that the Federal Reserve and the Biden Administration’s fiscal policies could keep inflation high. Summers, who has an IQ — and an ego — in the stratosphere, has largely been dismissed by fellow Democrats.

SUMMERS KNOWS THAT INFLATION CAN BE MODERATED by less accommodative policies from the Federal Reserve, but Chairman Jerome Powell is nowhere close to raising interest rates. Of course, Powell doesn’t have to run for re-election next year; those who do will face consumers who see surging prices everywhere — and want higher wages to make up the difference.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

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This post was first published at the AGF Perspectives Blog.