President Biden often says there’s more work to do on the economy. It’s more true than he wishes.
The trend on inflation — Biden’s biggest political liability — has been going Biden’s way. It peaked at 9% in June 2022 and has since dropped to 3.1%. If that were a straight-line pattern, inflation would be close to the Federal Reserve’s 2% target by the time most Americans went to vote in the November elections.
It’s not a straight-line pattern, though, and for now inflation is a deep-rooted economic weed not easily exterminated. The latest numbers show overall prices levels have ticked upward for three months in a row. Economists thought the year-over-year inflation rate for January would drop below 3% for the first time since March 2021. Instead, it dipped just two-tenths of a point to 3.1%, indicating inflation isn’t receding as quickly as most people thought. The cost of housing, including rent, remains persistently high and a surprise spike in the cost of car insurance has offset lower prices elsewhere.
A single economic report can often be a head fake, but other numbers also show inflation is not dead yet. Wholesale prices also rose by more than expected from December to January, which suggests future retail prices could also be higher than expected. A recent surge in consumer confidence also stalled, mainly because Americans who thought inflation was receding suddenly aren’t so sure.
The Biden White House boasted that “sentiment lost no ground this month,” arguing that “consumers continue to feel more assured about the economy.” Maybe. But not going backward isn’t as good as moving forward, and the White House is surely aware that modestly improving confidence levels haven’t moved Biden’s approval rating one inch. It remains stuck around 40%, where it has been for nearly nine months.
Markets seem unperturbed by the inflation blip, with the S&P 500 index hitting a new all-time high despite the hotter-than-expected inflation news. Investors don’t care about the election, though. Not yet, anyway. They mainly care about profits, earnings, and Federal Reserve policy. The hot inflation data scotched any likelihood of a Fed interest rate cut in March, delaying it until May or June at the earliest. Markets decided that was fine and continued the upward march they’ve been on since late October.
Biden’s timing is very different. Inflation is not yet low enough to boost his approval rating and raise his odds of reelection in November, which for now are in the 50-50 range. A 3.1% inflation rate isn’t a problem in itself. The problem is that many prices that have gone up have stayed up, including for rent, food, and transportation. Shoppers on a budget don’t care much that prices are rising by less than they used to be. They care about meat, cereal, gas, and auto repair bills that take a bigger bite out of their paychecks than they did two or three years ago.
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Biden is in a race against time. He needs inflation to drop to the point where voters aren’t really thinking about it anymore. The best thing for Biden would be outright declines in the price of staples, which most economists don’t think is likely. The next best thing is continual progress against inflation, and that has been interrupted.
It could be a short-lived truce, with the struggle against inflation gaining ground during the next several months. Retail sales sagged in January, suggesting consumers who have been spending with abandon might be getting tapped out. That could actually be good for inflation. If demand weakens and stays there, moderating prices or even price declines are likely to follow. And there’s no sign yet that consumer spending is collapsing to the point it would cause a recession.
“The new year has started with hotter inflation than expected and colder economic growth,” economist Ed Yardeni of Yardeni Research wrote in a Jan. 16 analysis. “Nonetheless, these hot flashes and chills should be temporary. Inflation continues to moderate and the economy remains resilient.”
All Biden needs is for voters to agree, which, for now, they don’t.
Biden is getting a few other breaks. On Jan. 16, Democratic Sen. Joe Manchin of West Virginia said he won’t mount a presidential bid, a huge relief for Democrats who worried the attention-seeking moderate could produce a third-party bid that would sap centrist votes from Biden.
Biden’s likely Republican opponent, former President Donald Trump, also continues to make Biden look good by comparison. On February 16, a New York state judge ordered Trump and his company to pay $354 million in damages in a long-running civil case where the judge found Trump guilty of business fraud. Another judge, in New York City, has now cleared the way for the disrict attorney's criminal prosecution of Trump to bein in late March, which means there should be at least one jury verdict relating to Trump before Election Day. Some voters say they support Trump but might change their mind if he’s convicted of a crime, so the stakes are huge for Trump.
Trump also continues to make himself the center of controversy. He recently encouraged Russia to invade certain US allies in the NATO military organization, and the New York Times has reported that Trump may seek to impose a national abortion ban if elected president, which would run contrary to majority views on the issue. The economy may not help Biden all that much in November, but with Trump in the race, it may not have to.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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