This week in Bidenomics: Inflation fever breaks
Financial markets have finally decided that a two-and-a-half-year bout with inflation is winding down. The question now is whether voters who will determine the next US president agree.
The inflation report for October showed continuing declines in the overall rate of inflation and in price levels for most things. The annualized inflation rate fell from 3.7% in September to 3.2% in October. That’s a sharp drop from the peak of 8.9% inflation in June of 2022.
Year-over-year price changes in most things consumers spend their money on are back to normal levels, more or less. Rent is the biggest exception. It’s still rising at 7.2% year over year, and that’s important because housing costs are the biggest expense for most consumers. But rents on new leases are starting to decline modestly, and that should show up in future inflation data. Renters will start to feel the relief when current leases expire and they sign new ones.
The biggest implication of the latest inflation news is that the Federal Reserve is done hiking interest rates after rapidly jacking up short-term rates by 5.25 percentage points since March of 2022. That was one of the fastest hiking cycles ever, and it came with a major risk the Fed would move too far, too fast and tip the economy into recession. It now appears the Fed will get the job done without a big spike in unemployment or a major economic downturn.
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
Investors have been waiting—praying, actually—for signs that inflation is finally on the run. There have been several head fakes, when one set of data showed improving inflation but another suggested, no. The Fed, meanwhile, kept hiking.
But investors think the October inflation data gave the all-clear, which is why stocks soared following the news. Follow-up data reinforced the trend. Wholesale prices in October fell by the most in three and a half years. Import prices dropped by 0.8% from September to October, the most in seven months. Walmart CEO Doug McMillon said deflation, or falling prices, could be coming soon. Oil prices have been tumbling and gasoline prices have dropped by $0.60 since summer, to a national average of $3.33 per gallon.
“It’s no longer debatable,” economist Ed Yardeni of Yardeni Research wrote in a Nov. 15 analysis. “Inflation has turned out to be a transitory rather than persistent problem.”
Voters are going to need some convincing. Only 38% of Americans approve of President Biden’s handling of the economy, and inflation is clearly the reason for the poor marks. Most other parts of the economy are performing well. Unemployment is very low at 3.9%, and the economy turned in blockbuster GDP growth in the third quarter. If you knew all the stats about the US economy except the inflation rate, you’d think it was an epic boom.
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A declining inflation rate doesn’t automatically produce a windfall for consumers. Most prices aren’t actually falling; they’re just rising by less than they used to be. All the price hikes of the last two years are still there. Incomes rose by less than prices for most of Biden’s first two years in office, which means the typical family was losing ground to inflation. That perverse equation has only recently flipped, so that incomes are once again rising faster than prices. It will take time for people to feel like they’re regaining ground and getting ahead of inflation.
Biden does have some time to work with: About 11 months, to be exact. That’s when swing voters likely to determine the winner of the 2024 presidential election will be deciding whether Biden deserves another four years.
If the current trend continues, the annual inflation rate should be around 2.5% in the home stretch of next year’s election, when swing voters are making up their minds. Consumers may notice price drops on some key products, including food items. Rent inflation will be lower than it is now. Gas prices are unpredictable, but if there’s no major disruption to oil supplies, they could be at current levels or a little lower.
Those would be good numbers for an incumbent president, if consumers hadn’t lived through two years of price hikes that far outstripped incomes. So the biggest inflation variable may be whether the inflation shock of 2022 has faded enough by 2024 for voters to feel bullish about the future. The trend is now Biden’s friend, but skeptical voters need to believe it’s actually here to stay.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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