Washington Insider-- Monday

Inflation Debate Lingers

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

USTR Indefinitely Suspends Tariffs Over French Digital Services Tax

The U.S. will not impose tariffs as a result of the Section 301 investigation of France's Digital Services Tax (DST), according to a statement from the Office of the U.S. Trade Representative (USTR), handing the decision over the incoming Biden administration.

USTR notified of additional tariffs in July that were to have taken effect Jan. 6, but that date arrived with no formal action or announcement from USTR.

“The U.S. Trade Representative has decided to suspend the tariffs in light of the ongoing investigation of similar DSTs adopted or under consideration in ten other jurisdictions,” USTR said. While those investigations have “significantly progressed,” USTR said, they have “not yet reached a determination on possible trade actions.”

The matter now lands with the incoming Biden administration which has indicated that trade matters are going to be further down the list of their focal points as combatting the COVID pandemic and rebuilding the U.S. economy will take center stage. However, given the potential impacts such tariffs could have on services trade, this is a decision that could well be viewed as an economic matter which could elevate it as a focal point for the new administration.

France and other countries feel American companies are profiting enormously from local markets while making only limited contributions to public coffers. Paris has offered to withdraw the tax as soon as an OECD deal is reached, while other countries are looking at implementing their own DST. As noted, the USTR decision puts the responsibility of the tax disputes on the incoming Biden administration.

"America is going to have to respond," Sen. Ron Wyden, D-Ore., the next chairman of the Senate Finance Committee. "Many of these unilateral taxes have been designed to target American companies that are generating high-skill, high-wage jobs."

November US Ag Exports Top $15 Billion For Second Month In A Row

U.S. agricultural exports in November were valued at $15.48 billion, marking the second consecutive month above that level after they were at $15.13 billion in October. November ag imports totaled $11.37 billion, down from $11.62 billion in October, but still a second straight month above $11 billion.

The result was a trade surplus of $4.11 billion, up from $3.52 billion in October.

U.S. agricultural exports are typically the highest at the start of the fiscal year in October and then usually work lower from that point. Ag imports usually do not peak until the March-May timeframe. The November total for U.S. ag exports did not register a new monthly record as that was set in November 2013 when export totaled $15.81 billion. U.S. ag imports in Fiscal Year (FY) 2020 were at or above $11 billion for five months and the data sets the stage for another strong run for imports, especially with expectations that the U.S. economy will improve.

But the export outlook could also remain strong with the U.S. dollar under pressure, making U.S. ag exports more competitive on the world market.

USDA forecasts U.S. ag exports at $152 billion for FY 2021, up from $135.9 billion in FY 2020, with imports at a record $137 billion, up from a record $136.0 billion in FY 2020.


Washington Insider: Inflation Debate Lingers

Bloomberg is reporting this week that investors and economists who think America is in for a bout of inflation are seeing “fresh ammunition for their arguments.”

That view is that the vaccines now hold the prospect of an end to pandemic restrictions and could bring consumers roaring back—and that pent-up demand could stimulate price increases. The incoming Biden administration likely will prop up household spending with more financial aid, the argument goes even as the dollar continues to weaken and commodity prices rise steadily.

However, the predominant view among economists – including, crucially, at the Federal Reserve – is that it will be some time before the U.S. has to worry about inflation.

Data due on Wednesday are expected to show that consumer prices increased 1.3% in 2020, and that in spite of rising costs for many producers the Fed's preferred measure won't exceed its 2% target even by the end of 2022. And Fed officials say they want to see inflation stay above that level for a while before they'll raise interest rates.

Inflation skeptics point to job markets still depressed by the virus and deeper trends in demographics and technology that keeps prices down, as well as the risk that politicians will cut off support for the economy too early – as they've done in the recent past.

So is inflation on its way back?

Bloomberg argues that policy settings just got tweaked even further toward the “run-it-hot” end of the dial. Fiscal spending has been the engine of recovery from the coronavirus slump and President-elect Biden – who's promising to do more of it – has a clearer path to getting his plans through Congress after Democrats won both Senate seats in a run-off vote in Georgia.

Americans are already spending more on goods than they did before the virus. If that's not yet the case with services, it's because lockdowns have taken consumer options off the table – something that should change as more people are inoculated.

Morgan Stanley economists expect “a sharp rebound in demand, especially in COVID-sensitive sectors like travel and tourism,” as vaccines get a wider rollout in the spring. They forecast that core inflation, which strips out the prices of things like food or gasoline because they're more volatile, will hit the 2% threshold this year and overshoot it in 2022.

Stimulus checks and higher unemployment benefits pushed household incomes up in the aggregate even as economic output shrank – a rare combination. And rising stock and housing markets helped add more than $5 trillion to the net worth of U.S. households in 2020.

Also, higher-income and older people, more likely to self-quarantine, have accumulated savings while waiting out the pandemic, says Mark Zandi at Moody's Analytics. They've missed out on things like trips to the hairdresser, vacations and meals out and they're “in an especially good financial position to ramp up spending on these services once they feel safe.”

Bloomberg's counter-argument is after 2008 the government and Fed also injected money into the economy, causing many to predict inflation that never arrived. Fiscal spending has been bigger this time, but so was the hole in the economy that it had to fill, so the result won't necessarily be overheating.

So far, this decade looks much like the last one, says Ben May at Oxford Economics. “Deficient demand has been countered by looser monetary and fiscal policy. This has boosted asset prices, but underlying consumer price inflation has remained weak.”

Another lesson from the financial crisis is that America's politicians aren't always the spendthrifts of popular caricature. They may actually suffer from the opposite bias. That's what happened after the 2008 crash, slowing the recovery. And a more tolerant view of deficits has taken hold since then.

In addition, even optimistic forecasters say it will be years before the U.S. is employing as many people as it was in 2019. A key lesson from the long expansion of the 2010s was that those resource market declines were deeper than previously thought.

That may be true for the post-pandemic economy too. Goldman Sachs, for example, raised its growth forecast after the Georgia election and now sees the economy expanding 6.4% this year – recouping all the COVID losses and then some. But it still doesn't expect core inflation to edge above 2%--triggering higher interest rates – until 2024.

Bloomberg also expects the “transitory” developments to ultimately be overcome by considerable economic slack.” Were it not for a collapse in labor participation related to the pandemic, the unemployment rate would be closer to 9.5% rather than the 6.7% last reported, levels that would considerably mute the rhetoric among the inflationistas.

But for monetary economists, higher prices only really count as inflationary when they stoke expectations of even higher prices in the future that generate momentum that is hard to control. That happened in the 1970s, Fed Chair Jerome Powell told reporters last month--but not more recently, and probably not this time, either.

So, we will see. Clearly, the fight against the pandemic will be central to what happens in the near future – and the economic debates and trends should be watched closely by producers as them emerge, Washington Insider believes.

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