June Washington D.C. Preview

As gas prices to food costs hit record highs at the onset of the summer season, Pro policy teams take a look ahead at what to expect in the coming months as inflation rages on — and prices continue to rise.

QUICK FIX — The Federal Reserve has rolled out aggressive interest rate hikes to fight inflation, and the central bank has indicated that summer may bring even more increases.   — As high gas prices continue to break records almost daily, inflation has also caused the price of natural gas to spike.   — President Joe Biden laid out a plan to fight inflation in a recent Wall Street Journal op-ed, which included tax increases and more robust tax collection efforts.

FINANCIAL SERVICES Fed eyes rate hikes to fight inflation: The Federal Reserve, the nation's chief inflation-fighting authority, is engaged in a campaign of aggressive interest rate hikes to try to tamp down price surges. Its plans have already led to drops in the stock market and higher bond yields, but the central bank will be watching job openings, the housing market and inflation data to see how effectively it is turning the tide. This summer could bring at least two additional half a percentage point increases, and the Fed will also continue efforts to shrink its $9 trillion bond holdings, which have already helped increase longer term rates like mortgages. The Fed will meet June 15. — Victoria Guida   Housing costs fuel inflation: The cost of shelter, one third of the official inflation gauge, is the single biggest driver of rising prices — and there’s no sign housing costs will come down anytime soon.   Mortgage rates, meanwhile, have risen at the fastest pace in 40 years, putting already-expensive housing out of reach for many would-be buyers. It’s already hurting sales: New-home sales fell 16.6 percent from March to April.   Economists expect housing price growth to moderate as a result, with several forecasters expecting home prices to be up about 5 percent for the year by the end of 2022. That’s a far cry from the 19 percent growth seen in 2021, but little comfort to Americans struggling to afford the cost of housing.   Construction costs, meanwhile, are up significantly — raising concerns that builders will begin to pull back despite a historic shortfall in the supply of homes to meet demand. All of it is putting pressure on rents, currently up over 15 percent from a year ago. — Katy O’Donnell

ENERGY Energy prices are expected to continue rising through summer before tapering off and are all but certain to contribute to the inflation headaches that will be a political liability for Democrats heading into elections in November.   Oil production in the United States has steadily increased since energy companies significantly reduced operations two years ago in response to cratering demand due to the Covid pandemic. The Biden administration has repeatedly asked companies to raise production, something that has drawn fire from environmental groups concerned about the climate impact. But oil production still lags behind 2019 output as companies focus on returning money to investors and tread carefully on developing new projects.   Meanwhile, most of Europe will soon stop taking deliveries of Russian crude to end their indirect funding of Russia’s invasion of Ukraine. That will increase the EU’s imports of oil from other sources, driving up prices, though that may be tempered if China takes more Russian crude and turns away from non-Russian sources, analysts have said.   After heavy pressure from the Biden administration, OPEC+ also decided to increase its production in July and August. But the cartel’s announcement failed to pressure prices and did not win over lawmakers on the Hill.   U.S. fuel making capacity has also become a bottleneck as refinery closures have caused production capacity to shrink to levels last seen in 2014.   Besides the cost increase in road fuels, inflation has also caused the price of natural gas to spike. That will eventually add to the general inflation atmosphere as natural gas is used to produce fertilizers, plastics and other goods.   Drivers have not yet made noticeable changes in their driving habits despite gasoline prices reaching all-time nominal highs. Prices are below the inflation-adjusted highs seen in 2009 and are only now reaching consumers’ pain threshold as a percentage of their disposable income. Electric vehicles have seen an uptick in sales, but remain too expensive to be accessible for many drivers, though at least one automaker has recently dropped its prices.   High inflation is expected to continue through the summer driving season, normally the most travel-laden time of the year as people go on vacation. Households are signaling that they may shorten or cancel travel plans, however, and some economists have forecast that higher prices in general could cause the economy to start slowing down, which would reduce fuel demand and rein in energy prices. — Ben Lefebvre

EMPLOYMENT AND IMMIGRATION Inflation spurs workforce development overhaul: Democrats are scrambling to patch the workforce development system as a means of reinforcing its supply chain and keeping inflation from spiraling further.   With nearly two job openings for every worker seeking employment in April, economists say one reason for the mismatch is a failure to effectively prepare workers for in-demand roles. Many of the shortfalls are in sectors particularly crucial to a healthy supply chain, including trucking, manufacturing, railroads and ports.   The Labor Department is working to expand apprenticeships in careers along the supply chain, including by its recent creation of a pilot program to recruit and train more truck drivers.   And House Education and Labor Chair Bobby Scott (D-Va.) is leading a push to reauthorize the Workforce Innovation and Opportunity Act, which funds the bulk of the federal government’s 43 employment and training programs. The House passed Scott’s legislation, which would boost funding to $74 billion over six years, last month.   What happens next is less certain: Republicans are unhappy with the measure, which Democrats rolled out on their own following a failure to reach agreement on funding levels — and union sway — among other things.   Democrats’ stalled reconciliation package would also invest in training. The $1.7 trillion “Build Back Better” package contained $20 billion for workforce development. Almost $14 billion would have gone to the Labor Department for programs like apprenticeships. More than $6 billion would have been reserved for Education Department efforts, including $5 billion to run community college programs that partner with businesses.   But the future of that legislation is cloudy at best. Negotiations between major players in the Senate have yet to bear fruit.   The COMPETES Act also contains workforce development provisions, including language that would make more programs eligible for financial aid under the Pell Grant program. Employers say these are critical to making sure chip manufacturers and others have the labor they need. The legislation has passed both the House and Senate, and lawmakers are now working out differences between the two versions. — Eleanor Mueller

TAX Tax away inflation? Among the prescriptions Biden laid out for fighting inflation in a recent Wall Street Journal op-ed were tax increases and more robust tax collection efforts.   “The Internal Revenue Service should have the resources to collect taxes that Americans already owe. We should level the international taxation playing field so companies no longer have an incentive to shift jobs and profits overseas. And we should end the outrageous unfairness in the tax code that allows a billionaire to pay lower rates than a teacher or firefighter,” Biden wrote.   All of that would reduce the deficit, which, in turn, would “help ease price pressures,” he posited.   But tax experts caution it’s unlikely to be a quick fix, even if it were possible.   “While Biden is focused on tax hikes on the wealthy and corporations to reduce the deficit, the most direct way to use taxes to slow inflation would be to raise levies on low- and moderate-income households, whose spending habits are most sensitive to changes in incomes,” Tax Policy Center Senior Fellow Howard Gleckman wrote in an analysis on the group's website.   But that would violate Biden’s pledge not to raise taxes on anyone making $400,000 or less — and certainly be a nonstarter with his fellow Democrats.   “What about raising taxes on businesses?” Gleckman wrote. “Remember, today’s inflation is caused by a mix of high demand and an unusually low supply of goods. It is hard to see how raising taxes on goods producers would increase the supply of those products.”   In his op-ed, Biden noted that controlling inflation is primarily the job of the Fed. And Gleckman said the president might be wise to heed that.   “Maybe the right answer is the usual one: Given enormous geopolitical and economic uncertainties and a slow-to-react Congress, the hard work of responding to high inflation should be left to the Fed, not tax policy,” he wrote. — Toby Eckert

DEFENSE Congress looks to inflate Pentagon budget: How best to address rising costs for the military will be a central debate when the House and Senate Armed Services committees consider their annual defense policy bills starting this week.   Republicans, and some Democrats, are pushing for a significant increase to Biden's $773 billion Pentagon proposal. Concerns that runaway inflation could eat away at the funding increases lawmakers approved in recent years are driving the push to boost the Pentagon budget.   GOP defense hawks have called for a 5 percent increase above inflation over the current year's level.   Pentagon leaders aren't entirely opposed to more money to tackle inflation. Defense Secretary Lloyd Austin and other top officials have acknowledged that inflation has outpaced the projections made when the budget was constructed.   Still, expect the administration to push back on efforts by Congress to use a larger topline to purchase more expensive weapons the Pentagon didn't request. — Connor O'Brien

HEALTH CARE Inflation’s mixed bag for health policy: Inflation has an unexpected upside for Medicare actuaries. High inflation is good for Medicare Part A, which sets rates for hospitals based on expected inflation. Last year, those rates were much lower than actual inflation turned out to be, which helps hold down costs and is one reason the Medicare Trust Fund is expected to last two years longer than previously thought.   It doesn’t hurt that a scorching hot labor market and rising worker wages means more tax revenue than anticipated, which helps fill the Medicare coffers.   But inflation also presents one more challenge for Democrats hoping to revive any parts of Biden’s social spending package. Sen. Joe Manchin (D-W.Va.), whose vote is key to any Senate deal, has warned for months about rising inflation, citing it as a reason to pare down Democrats’ $1.7 trillion proposal.   His resistance means Democrats, who have talked for years about cutting the cost of prescription drugs, face the possibility their majorities will go home empty handed, imperiling their majorities.   Sen. Maggie Hassan (D-N.H.), an endangered incumbent, said her goal is to “hold Big Pharma accountable and bring down prescription drug costs,” though an agreement to do so has proven elusive. — Dan Goldberg

EDUCATION Students feel the pinch of the pump: Even though school is largely out for the summer, college students planning to take summer courses face steep gas hikes that could hurt their commutes to campus. Southwest Tennessee Community College President Tracy D. Hall announced it would have virtual classes on Fridays through Aug. 12 as a cost savings measure for students and employees.   “Our students and employees, like the rest of the nation, are facing historic inflation numbers and increasing gas prices,” Hall said in a statement. “We are concerned about their welfare and how they may be impacted by this increased cost of living.”   Student loan debt relief won’t help: While the White House mulls its options for sweeping student loan forgiveness, student debt relief would have a “pretty small” impact on inflation, according to National Economic Council Director Brian Deese. And the economic impact of such a proposal would “be across the course of years, or a couple of decades.”   Deese said the economic impact of any loan forgiveness would depend on how the White House structures the program and when the Biden administration will resume monthly student loan payments that have been frozen since March 2020. — Bianca Quilantan

CANADA Red hot and rising: Canadians are dealing with decades-high inflation that has been fueling affordability fears. Price growth, which hit 6.8 percent in April, is poised to keep accelerating. To try to bring the runaway inflation under control, the Bank of Canada delivered a second-straight supersized interest rate hike last week of 50 basis points. The central bank has been spending a lot of time admitting it underestimated the strength and staying power of the price pressures.   A day after the most recent rate increase, Deputy Gov. Paul Beaudry warned inflation is likely to move even higher in the near term before beginning to ease. The bank is worried the longer inflation stays above 3 percent the greater the risk people will expect prices to continue climbing. Such a scenario could make price growth self-fulfilling, he said.   “History shows that once high inflation is entrenched, bringing it back down without severely hampering the economy is hard,” Beaudry said. The bank is now widely expected to deliver another extra-large rate hike at its next meeting on July 13. The big question is whether the increase will be 50 basis points — or possibly even 75. — Andy Blatchford

CANNABIS Inflation exacerbates access woes for medical marijuana patients: Medical marijuana is legal in 37 states, but because cannabis is federally illegal, it isn’t covered by health insurance. While many Americans pay small co-pays for prescriptions, they’re subject to the whims of the market when shopping for medical marijuana — even when recommended by a doctor. While the price differs dramatically from state to state, affording medical marijuana can be an insurmountable financial burden for some, often costing hundreds of dollars per month.   For patients with conditions like debilitating seizures, marijuana is a potentially life-saving plant, one they cannot give up despite inflation. Even so, there is no federal plan to address this issue. No bill has been introduced to require insurance companies or government-run health programs to cover medical marijuana. Until marijuana is removed from the Controlled Substances Act, patients will continue to pay out of pocket for medical marijuana. — Natalie Fertig