Inflation Haunts the Biden White House
The specter of inflation haunts the corridors of the West Wing, and the Biden administration’s every attempt to exorcise the poltergeist of rising prices only deepens the grip of its possession.
The most recent consumer price index (CPI) reports have show inflation accelerating at an alarming pace. After the annualized monthly rise in CPI fell below two percent in October and November, inflation surged higher and has been running much hotter each month since.
In December, inflation rose at an annualized rate of 2.8 percent. In January, this accelerated to 3.7 percent. In February, we hit 5.4 percent. In March, the latest figure available, the consumer price index climbed at an annualized rate of 4.6 percent.
Economists like to tell us that we should look beyond the monthly figures to discern underlying trends. Unfortunately, the news here is not much better. The three-month annualized increase in CPI was 4.6 percent in March, and the six-month was 3.2 percent, a clear sign that the trend is for more inflation. Core inflation’s three-month annualized figure is only slightly lower at 4.5 percent, while the six-month average is 3.9 percent.
A lot of politically progressive analysts claim that shelter prices distorts the picture because of the lagged way changes in rents get calculated into the consumer price index. But excluding shelter does not improve things. To the contrary, three-month annualized core services inflation less shelter stood at 7.8 percent at last count. The one-month annualized figure in March was 8.5 percent.
Next Week’s Inflation Numbers Look Scary
Next week, the Department of Labor will release the consumer price index for April. The Cleveland Fed’s CPINow is forecasting a month-to-month increase of 0.41 percent, which would be around a five percent annualized increase. That would be an acceleration from March 0.38 percent. This would bring the three-month annualized increase also up to around five percent.
Core inflation should be a little cooler since it excludes gasoline prices, which rose sharply in April. The Cleveland Fed’s nowcast has it rising 0.31 percent, or 3.78 percent annualized. The three-month annualized increase would come to 4.2 percent.
If the nowcast is close to being correct, the April CPI data will not provide confidence to the Federal Reserve that inflation is coming down to its target. Instead, it will likely be interpreted as further evidence that inflation has become embedded at a high level. At the very least, the nowcast figures imply that the Fed will have to wait longer for a rate cut.
Right now the market is pricing in November as the earliest likely cut, with the odds more heavily favoring a December cut — not that it would make all that much of a difference. If the Fed does cut in November, it’s likely to pause in December rather than follow with another cut. So, at most we’re looking at a single cut this year.
Any upside surprise to inflation will likely mean no rate cuts at all this year or even at the January 2025 meeting. That would push the earliest cut all the way out to March. Most likely, however, the market will begin seriously contemplating a Fed hike if it decides that inflation is running too hot for the Fed to cut.
The Rising Political Cost of Inflation
This is a major problem for Biden’s re-election chances. The White House had been counting on inflation to fall and for the Fed to endorse its message that the inflation danger was over with a rate cut. That is now very unlikely.
The public is very focused on the problem of inflation. The latest poll from the Economist and YouGov shows that 22 percent of the public say inflation is the most important issue to them, making it by far the leading issue. After inflation is “jobs and the economy,” at 11 percent and immigration at 11 percent. Seventy-seven percent of the public says inflation is a very important issue, more than for any other issue.
When asked how much inflation has impacted them personally, 58 percent say they’ve felt it “a lot.” Another 38 percent say “a little.” Just four percent say they haven’t felt inflation in their lives at all.
Sixty-one percent of the public say they disapprove of Biden’s handling of the issue of inflation, including 48 percent who strongly disapprove. Just 10 percent of the public say they strongly approve of Biden on the issue of inflation.
Worry over inflation is not a partisan issue, although Republicans are more concerned than Democrats. The Economist/YouGov poll found that 64 percent of Democrats, 76 percent of independents, and 91 percent of Republicans say inflation is a very important issue. Less than five percent of any political persuasion describe it as unimportant or not very important.
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Supporters of Biden point to the strength of the labor market in an effort to burnish the president’s economic record. But polling suggests this rings hollow to most voters. Asked to rank the relative importance of inflation and unemployment, just three percent say unemployment is more important, 57 percent say inflation is more important, and 37 percent rank them equally. Even among Democrats, just five percent say they rank unemployment as more important, 55 percent say they rank inflation as more important, and 33 percent rank them equally.
Historically, incumbents face steep climbs when inflation soars. Voters do not cast their ballots in the abstract; they vote on the visceral realities of their daily lives. If their money buys less than it did yesterday, discontent brews. Biden’s team is undoubtedly aware of this historical precedent. The challenge they face is not merely to stem inflation but to communicate effectively about what has been done and what is being done to address it.
This week, Biden sat down for an interview with CNN’s Erin Burnet. The result was disastrous. Biden claimed that “no president has had the run we’ve had in terms of creating jobs and bringing down inflation.”
But the American people do not think inflation is going to come down further. The Economist/YouGov poll shows that 44 percent of people expect a higher rate of inflation six months from now, 25 percent expect inflation to stay around where it is, and just 15 percent expect lower inflation.
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Even Democrats cannot bring themselves to muster much enthusiasm over inflation. One quarter expect higher inflation, 31 percent expect the same rate of inflation, and 27 percent expect lower inflation.
Biden also could not confine his comments on inflation to the limits of reality.
“It was nine percent when I came to office. Nine percent,” Biden said.
It was actually 1.4 percent when Biden came into office. It only climbed to nine percent after he had been president for nearly a year-and-a-half.
This sort of loose approach to the truth about inflation—regardless whether it is rooted in forgetfulness or intentional lying—is unlikely to inspire much confidence among voters between now and election day.
