Inflation Tumbles Giving Biden Cover on Student Loans

The Federal Reserve's announcement on Friday that inflation eased in July is welcome news to the Biden administration in a week where the president is under fire for his decision to cancel some student loan debt for millions of Americans.

According to the Federal Reserve, the Personal Consumption Expenditures (PCE) index was up by 6.3 percent in July compared to the year before, a drop from the 6.8 increase seen in June. On a monthly basis, the price index plunged by 0.1 percent, more than experts expected. Core inflation slowed to a 4.6 percent annual increase from 4.8 percent in June.

The cooldown of prices, which is partially due to lower gas prices, could potentially appease the fears of those who were concerned that President Biden's decision to cancel student loan debt could worsen inflation at a time when this has reached a 40-year record high.

A poll by CNBC/Momentive before Biden's announcement on Wednesday found that 59 percent of Americans were concerned about how loan forgiveness could negatively impact inflation.

The drop in inflation in July gives Biden some cover in case the decision to wipe out $10,000 in debt for those earning less than $125,000 per year and $20,000 for those who had received Pell grants for low-income families should actually worsen inflation, as some economists fear.

Jason Furman, the former chairman of Obama's Council of Economic Advisors, wrote on Twitter on Friday that the data released by the Fed shows "great personal income data. Strong income growth. Moderate consumption growth."

Before the new data were released, Furman estimated Biden's decision to cancel student loan debt to add about 0.2 to 0.3 percentage points to inflation and likened it to pouring "gasoline on the inflationary fire that is already burning."

Newsweek reached out to Furman for comment on the new data.

But there seems to be a generally positive sentiment around inflation at the moment—at least more positive than has been for the past eight months. According to the University of Michigan's index of consumer sentiment, consumer sentiment has risen in August, with expectations for inflation dropping to their lowest level since December 2021.

The University of Michigan's index of consumer sentiment rose to 58.2 this month from July's 51.1, higher than the 55.2 reading economists were expecting.

On the other hand, consumer expectations for inflation over the next year fell to 4.8 percent in August from 5.2 percent in July, while expectations for inflation over the next five years remain unchanged at 2.9 percent.

But despite the relief offered by the Fed's latest data, inflation remains one of the top concerns for Americans. Fed Chairman Jerome Powell says the fight against inflation is far from over.

"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance," Powell said on Friday. "While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses."

Whether Biden's decision to cancel billions in student loan debt for millions of Americans would negatively impact inflation or not, remains to be seen.