Everyone wants inflation to go away. For a while it looked hopeful. But we can’t completely slam the door on this guy.
April 26 brought the latest of several signs that inflation is picking up speed again. Personal consumption expenditures, a measure of inflation that the Federal Reserve closely monitors, recorded annualized inflation of 2.8% in March, slightly higher than expected. The consumer price index, another key indicator, has risen over the past two months and now shows an inflation rate of 3.5%.
Inflation peaked at 9% in June 2022, then fell sharply for a year, reaching a cycle low of 3.1% in June 2023. That seemed promising for President Biden’s re-election prospects; The worst economic scourge of his presidency appeared to be quickly disappearing.
But it hasn’t disappeared. Inflation has hovered in the low 3 percent range over the past nine months, well above the Federal Reserve’s target of 2 percent. Stubborn inflation has important implications for the rest of 2024.
If inflation had continued to fall until the end of 2023 and into 2024, it would essentially be at a normal level by now. Going into 2024, investors thought it was highly likely that the Fed would begin cutting interest rates due to contained inflation in the first half of the year, providing some relief to car and home buyers who finance their purchases with loans would. It now looks as if interest rate support will not come until the fall at the earliest and possibly only after the November elections.
Biden could have worse problems. Inflation continues because consumers are generally in good shape and willing to spend money. This keeps demand high and prices tight. Economic output grew by 1.6% on an annual basis in the first quarter, which was weaker than expected but still positive. And that followed unsustainably high GDP growth in the second half of 2024.
Goldman Sachs was so impressed by the economic news that it set its second-quarter GDP growth target at a robust 3.5%. Some electoral models assume that solid economic growth in the second quarter of an election year is almost always accompanied by the re-election of an incumbent president seeking a second term.
Biden’s prospects are bleaker. Most economists still expect the recent surge in inflation to ease soon. Two categories are currently responsible for most of the inflation: car insurance and rent. Insurance costs will eventually stabilize, and rent inflation calculations somewhat exaggerate the reality because they undercount people signing new leases for less money. There is virtually no inflation in goods anymore and some products are starting to become cheaper.
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But the Fed has made it clear that it will not cut interest rates until it is truly sure that inflation has gone away. And it’s not gone yet. Therefore, interest rates are likely to remain where they are for several more months and possibly until Election Day in November.
Interest rates are not at historic highs. They are actually closer to historical norms. But they are much higher than they have been recently, and that is the basis of comparison for many people when they ask whether they are better off under Biden.
Headlines like these certainly don’t help the president: “Mortgage rates are reaching new highs.” Or this one: “The cost of buying a home has reached an all-time high.” According to a recent report from Redfin, this is due to a combination of high home values and relatively high financing costs. Such a hurdle makes Americans skeptical about whether the economy is actually as good as growth or jobs data suggests.
Fading hopes for rate cuts have also disrupted a sharp stock market rally that began last October. The S&P 500 (^GSPC) hit new highs in March but has since fallen about 3% due to higher bond yields. Stocks fell on signs of stubborn inflation, then rose again as investors believed things might not be so bad after all. The stock market can’t really predict who will win the presidency, but rising stocks are making many Americans feel better.
The question for Biden is where the fight against inflation will take place in September and October, when the last undecided voters in a tight race decide who to support or whether to vote at all. The earliest chance of a Fed rate hike now appears to be September. If it doesn’t happen then, it won’t happen until after the election.
Biden may not need the help of Fed rate cuts. Interest rates could fall on their own if optimistic investors regain faith in impending rate cuts and price in future Fed action. Stocks could continue to rise if corporate earnings remain solid and the Fed remains undeterred.
What Biden probably needs is for most voters to be confident that inflation has finally disappeared. And it’s not… quite yet… The stubborn and unwelcome visitor could still cause a bit of mischief.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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