WASHINGTON — Inflation was a pivotal issue in the midterm elections, with voter anger about the rising cost of living helping Republicans win a narrow House majority. But that doesn’t mean they have a plan to rein in sky-high prices next year.
And economists say that’s actually a good thing.
House Republicans campaigned on an economic platform of lowering inflation by curbing wasteful government spending, increasing energy production, unsnarling the supply chain, and boosting jobs and wages “through pro-growth tax and deregulatory policies.”
But those are all longer-term initiatives. They don’t really have a short-term plan, and even if they did, they’re unlikely to get any significant legislation through the Democratic-controlled Senate and past President Biden’s veto pen.
“To be honest, taming President Biden’s inflation that continues to rage will be difficult,” Texas Representative Kevin Brady, a key player in the party’s economic strategy who is retiring at year’s end, acknowledged to reporters after the midterms.
Biden has taken several steps to try to ease inflation, including releasing oil from the nation’s Strategic Petroleum Reserve to help lower gas prices, but so far those have had limited impact, and much of the effort by him and congressional Democrats also are longer term.
Still, it’s the Republicans who made reducing inflation the centerpiece of their midterm campaign, and in the short term, they might have a greater chance of making the economy worse instead of better.
The only political leverage for House Republicans comes on must-pass bills to fund the government and raise the national debt limit for borrowing money to help pay for federal spending. Stalemates on that legislation could trigger a government shutdown or default on federal debt that would roil financial markets and damage an economy that already is expected to be teetering on the edge of recession next year.
But if those impasses can be avoided, the broader stalemate caused by divided government in Washington should help the inflation fight, economists said. It would keep politicians out of the battle, leaving the task to Federal Reserve officials who have the best tool — interest rate hikes — to bring down prices in the short term.
“I think realistically there’s going to be very little that the next Congress can do on the inflation front, or the administration,” said Douglas Holtz-Eakin, president of the conservative-leaning American Action Forum think tank and a former director of the Congressional Budget Office. “They would all be well-advised not to make it worse ... and don’t try to fix it because they really don’t have the tools for doing that.”
Inflation has shown signs that it has peaked after the annual consumer price index hit a four-decade high of 9 percent in June. The figure dropped to 7.8 percent in October after months of Fed officials aggressively raising a key interest rate that affects consumer and business borrowing costs in hopes of reducing the demand that has helped drive up prices.
But there have been previous false dawns on inflation since prices started their rapid climb last year, following increased spending from federal COVID rescue money, pandemic supply chain problems, and sharply higher energy prices caused by Russia’s invasion of Ukraine. The war has sent inflation skyrocketing in much of the world.
In the United States, annual inflation remains well above the Fed’s goal of 2 percent. Americans got a fresh taste of the problem this past week as the American Farm Bureau Federation estimated the cost of Thanksgiving dinner was 20 percent higher compared to last year.
Republicans have blamed high prices on Democrats, branding the problem “Bidenflation” and making it a centerpiece of their midterm campaigns. National exit polls in House races found inflation was the top concern of voters, narrowly beating out abortion. Of the 31 percent of voters who said inflation was the most important issue in their decision, 71 percent cast their ballots for Republicans.
But Democrats have argued Republicans don’t have any real plan to reduce inflation and are poised to make it worse.
Biden and Democratic congressional candidates blamed the Ukraine war for much of the problem this year and pointed to their efforts to reduce prices by trying to fix supply chain bottlenecks and lowering costs for Americans on expenses like prescription drugs and health care in the Inflation Reduction Act signed into law last summer.
That bill’s name, rebranded after the collapse of Biden’s much more ambitious Build Back Better legislation, demonstrated the importance of inflation in the midterms even as it oversold the potential impact. Economists predicted the law would have little immediate effect on inflation and make only a marginal difference longer term.
Biden acknowledged in a news conference after the midterms that despite the Democrats’ efforts to reduce inflation, “it’s hard for folks to see ... that progress in their everyday lives.”
He promised to work with congressional Republicans next year on “good ideas,” but said he’d oppose any attempts to roll back parts of the Inflation Reduction Act or enact new tax cuts for wealthy Americans and large corporations.
“I want to be very clear: I’m not going to support any Republican proposal that’s going to make inflation worse,” he said.
Massachusetts Senator Elizabeth Warren believes that her fellow Democrats were able to avoid the large midterm losses that are usually sustained by the president’s party in his first midterms because they took steps to confront inflation and “delivered for working people.” She said that Republicans are more interested in causing “economic chaos” for their own political purposes than tackling inflation to help ease the burden on average Americans.
“When Democrats are in charge, Republicans will try to impose economic pain on families so they can blame us and seize power for themselves,” Warren said in a speech this month at a progressive economic conference.
As an example, she cited the Republican showdown over raising the debt limit in 2011 after the party had won control of the House during then-President Barack Obama’s first midterm election. The delay in raising the limit, which Republicans had used for leverage to force spending cuts, led Standard & Poor’s to downgrade the US government’s credit rating for the first time ever. Major stock indexes tumbled and the lower credit rating meant $1.3 billion in additional federal borrowing costs that year alone.
Some House Republicans are talking about leveraging the debt limit again to force spending cuts and other economic measures. Failure to raise the limit would mean the federal government would be unable to pay some of its debt and could push the US economy into a deep recession, said Mark Zandi, chief economist at Moody’s Analytics, an economics research and consulting firm.
“Breaching the debt limit or even kind of flirting with breaching the debt limit, that makes absolutely no sense whatsoever,” he said. “This is just going to result in chaos in the financial system.”
And he argued that the Republican focus on reducing government spending to lower inflation would not be effective because inflation is being driven now by the disruptions of the Ukraine war and continued problems from the pandemic.
“The root cause of this inflation is not fiscal policy, it’s not government spending,” Zandi said. “It goes right back to those two massive shocks that affected the economy.”
Bob Schwartz, senior economist at Oxford Economics, a global forecasting and analysis firm, said inflation probably would be high right now because of the Ukraine war, regardless of earlier Washington COVID spending. Still, he said the $1.9 trillion American Rescue Plan enacted in March 2021 helped fuel inflation in the United States.
Getting inflation under control now without causing a recession is not easy. But he said a Republican House majority probably will block any large new spending initiatives and that would help as Fed rate hikes slowly push inflation down to between 4 percent and 4.5 percent by the end of next year.
“At the very least, it probably short circuits any ambition tax and spending plans that Biden and the Democrats might have,” Schwartz said of Republicans winning the House majority and sharing power in Washington. “On the margins, gridlock is always better for inflation.”