WASHINGTON (BLOOMBERG) - "Is it easier for you to go and buy things in the stores than it was four years ago?" Ronald Reagan asked days before his sweeping 1980 presidential election victory. That simple question looms as a decisive factor in next year's congressional ballot.
Inflation is now running at its highest in a generation, with a report Wednesday (Nov 10) showing that consumer prices surged at a 6.2 per cent annual pace in October.
Nearly all economic forecasters expect it to cool in the coming year, but the key question for President Joe Biden and congressional Democrats is how quickly and how much.
While Mr Biden argues that inflation will be pulled down by his forthcoming US$1.75 trillion (S$2.37 trillion) social-spending Bill, along with a US$550 billion infrastructure plan he will soon sign, Republicans are hammering exactly the opposite argument: cash drops by the government are driving up prices.
Even some Democrats are echoing GOP fiscal concerns, complicating the outlook for the pending legislative package.
At stake in how quickly inflation recedes, and in the debate over the cause and remedy of the escalation in prices, is control of Congress.
In next November's midterm elections, Democrats' razor-thin majorities of both chambers will be up for grabs. It's effectively the first national election where inflation will be a prime issue since Reagan's win over President Jimmy Carter.
"We've never recorded as many people talking about high home prices or high appliance prices or high TV prices," said Mr Richard Curtin, who oversees the University of Michigan Consumer Sentiment Survey, a key gauge of household attitudes. "We get a large share of people talking about the reduction of their living standards due to inflation," made worse because "consumers see no effective economic policies that would restrain inflation," he said.
Treasury Secretary Janet Yellen said in an interview that aired Tuesday on National Public Radio's "Marketplace" that she expects inflation next year to be "closer to the 2% that we consider normal."
Outside forecasters largely agree. The median estimate of economists surveyed by Bloomberg is for a 2.8 per cent rate in the third quarter of next year, on the eve of the election, with 2.4 per cent seen for the final three months of 2022.
Gasoline futures are trading about 18 cents per gallon lower for next October compared to current levels, signalling prices at the pump should ease.
But much depends on the course of the pandemic, and things may get worse before they improve, with no guarantee that supply-chain bottlenecks will have fully cleared.
Meantime, rising prices at grocery check-out lines and the gas pump are already unsettling the public, and much of the country is in for more sticker shock when winter heating bills start arriving.
And even if headline inflation subsides, some costs might keep climbing. Goldman Sachs Group Inc economists expect rent increases next year to run at 30-year highs. The Wall Street bank's latest outlook pencils in inflation at an historically high rate above 4 per cent in the third quarter.
Biden on Wednesday said he'd directed top economic aides to focus on reducing energy costs, and flagged the role of the Federal Reserve in monitoring prices. He also asked regulators to watch for any "price gouging."
During a stop in Baltimore, he highlighted benefits from his infrastructure Bill as part of "a plan to finish the job of getting us back to normal" after the pandemic.
But most economists don't see a near-term impact on inflation from the fiscal packages. It can take years for infrastructure projects to affect transport and other costs, for example. And the ramping up of social safety-net support could in the meantime add fuel to already strong demand.
"The spending is front-loaded," said Dr Jason Furman, a former senior economic adviser in the Obama administration who's now a professor at Harvard University. Inflation could be boosted by "a few tenths of a percentage point" next year, he said. Longer term, any inflation impact would be "miniscule" and could work in either direction.
With American payrolls about 4 million lower today than they were before the pandemic, the biggest impact on inflation over the next year is likely to be how quickly people return to the labour force, Dr Furman said.
"Inflation right now is more uncertain than at any point in many decades. We're in such an unprecedented situation that our biggest lesson from the last year should be humility in our forecasts."
A key Democratic swing voter in the Senate, Joe Manchin of West Virginia, is worried enough about the idea that he's held up consideration of the social spending Bill the White House and congressional leaders are trying to get enacted. He's yet to commit to voting for the draft package.
Republicans have spent months concentrating their fire on portraying Democrats' pandemic relief Bill - signed in March and costing US$1.9 trillion - and the forthcoming social spending plan as inflationary.
For now, they're succeeding in tying Mr Biden to rising prices - a low bar since voters typically blame incumbents for inflation. By mid-October, 62 per cent of Americans said the president's policies are responsible, according to a Politico/Morning Consult Poll.
Democrats are now in a contest to show voters by next November they are gaining more ground from a growing economy and Mr Biden's US$1.75 trillion Build Back Better initiative than they are losing to rising prices.
It may take a while for voters to feel the impact of some signature pieces of that package, which still hasn't passed Congress.
Items such as the expanded child tax credit immediately put money in people's pockets, though that merely continues an income boost that families with children have been getting since July. Some other high-profile pieces are more complicated.
Ms Cindy Lehnhoff, director of the National Child Care Association, a trade group for licensed private child care centres, highlighted the importance of the legislation's subsidies capping child care costs at 7 per cent of income for families making up to 250 per cent of state median income, or about US$251,000 for a New York state family of four.
But the federal government first will have to come up with rules, and states will need to draft their own plans for the programme. In addition to the bureaucratic reasons for the delay, child care centres will need to expand staff.
"I think most states will still be in the planning process, quite frankly, on how to execute this" by next fall, Ms Lehnhoff said. "If I were running for office, I wouldn't depend on it."