Two Huge Obstacles Could Snag Infrastructure Talks; The Real Inflation Threat

by Greg Valliere, AGF Management Ltd.

CHANCES OF ENACTING AN INFRASTRUCTURE BILL by late summer improved yesterday as a bipartisan group of Senators agreed on a tentative deal. But two enormous obstacles may persist in talks with President Biden when he returns from Europe.

THE DOLLAR AMOUNT OF A DEAL, roughly $1.2 trillion over eight years, is close to what Biden could accept. But the two obstacles may take several weeks to resolve —

Obstacle 1 — How to pay for it? Participants in the talks claim that their bill is fully paid for, but it includes some new type of gasoline tax, indexed for inflation, which is a non-starter for the White House. And it includes money still not spent from previous covid relief bills; the idea of clawing back money from states now flush with cash also is a non-starter.

Obstacle 2 — Intense opposition from progressives, who scoff at a proposal so far below Biden’s initial $2.25 trillion goal, and the left’s fears of abandonment on the aggressive green energy goals that Biden proposed earlier this year. A moderate Senate bill could clash with an activist House measure, producing a conference committee deadlock between the two versions that could last for weeks, one source tells us.

NEVERTHELESS, A SCALED-BACK BILL has a chance of enactment before Labor Day, potentially a major win for Biden to accompany the $1.9 trillion Covid aid bill he got two months ago. But we continue to believe a second bill — nearly $2 trillion in social spending — is on life support, and a major tax hike faces an uphill path.

* * * * * *

AMID THE CACOPHONY OF COMMENTARY on inflation, we’ll add this quick point: most of the commodity inflation — lumber, corn, copper, etc. — will subside; in fact, some commodity prices already are subsiding. The real inflation threat is an intractable wage spike that may not subside.

WE CONTINUE TO BELIEVE THAT UNEMPLOYMENT may drop below 5% by year-end; it’s 5.8% now. In the uncharted waters following the pandemic, what will constitute full employment? We think the Federal Reserve will begin to worry by winter that full employment is imminent.

THE BIDDING WAR FOR LABOR will continue to be intense, even as workers return when unemployment benefits taper off. Companies will have to pay more in wages and benefits, and pass those costs on to their customers. That’s the inflation threat — not transitory commodity prices — that will prompt the Fed to become less accommodative.


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.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

©2021 AGF Management Limited. All rights reserved.

This post was first published at the AGF Perspectives Blog.

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