Could inflation sink Biden?

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It was the last thing Joe Biden needed. America’s March inflation data that came out on Wednesday has pretty much killed off any hope of a Fed rate cut before September, and possibly even before the presidential election in November. This is bad news for a Democratic turnout operation. From a voter sentiment point of view, it does not matter a great deal how high US growth goes if interest rates remain at such elevated levels.

The futures markets are still pricing in one, possibly two, cuts this year. But monetary policy could also go the wrong direction. According to Larry Summers, there is now a 15 to 25 per cent chance that the next Fed move will be to raise rates rather than cut them. (Knowing that you’re a Swamp Notes reader, Larry, I could not fail to notice that you have joined the bandwagon of people growing beards: the good news is that you can cut it all off in one move.)

I am not the person to break down the inflation numbers for Swampians. But it is worth stressing that the headline, core, and super core (services) inflation rates are all going the wrong way. At 3.8 per cent, the core rate is now almost double the Fed’s target number. Now, I can just about imagine a super-interpretive Fed chair, Jay Powell, reasoning that another Donald Trump presidency would be terrible for inflation — mass deportation, punitive tariffs on all imports, geopolitical uncertainty and political risk. A couple of rate cuts before November would therefore be disinflationary since it would assist Biden’s chances of re-election. Of course, this is a fantasy. The Fed is independent and would commit hara-kiri before betraying any political bias. But I am not exaggerating the Fed’s electoral influence.

In spite of everything, most voters are still unhappy about the state of the US economy. This has caused great puzzlement among the political cognoscenti who keep telling Americans they have never had it so good. Not only is inflation way down from where it was two years ago, they say, but the much-threatened US recession never happened. All of this is true. But if you cannot afford the mortgage on a new home and are still living with your parents or in an overcrowded rental with your peers, the macro-numbers come as little consolation. What would really change your outlook is lower interest rates. The political conventional wisdom also disapproves of how little the median voter cares about the future of US democracy. Believe me, I share that existential dread of a potential Trump second term. But most voters are tuned out, or write it off as “Cry Wolf” syndrome. 

There are other questions such as abortion, which cuts Biden’s way, and immigration, which favours Trump, that will sway voter choice and turnout in November. Israel will also play a role. But nothing weighs as strongly on voter sentiment as the direction of US interest rates.

I have one caveat on this somewhat gloomy prognosis. In 2022, almost every economist was forecasting that the US would go into recession. At the start of this year, the consensus was that the Fed would cut rates six times. That had fallen to three cuts by this week. Now it is down to zero. In other words, economists don’t have a clue what is going on. So they may be wrong about the Fed now. That is really all I have got.

Having said that, Soumaya, unlike me, you are a real economist and you have the name to prove it and I know you have more of a clue than me about what’s happening. My question to you is, what is underpinning the stubbornness of US inflation, and might conditions surprise us again in the coming months?

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Recommended reading 

• My column this week looks at America’s coming moment of truth on Ukraine. “Trump’s Republican Party treats Ukraine as the enemy and Russia as a friend,” I write. “Defining that stance as isolationist is lazy and wrong. It is actively pro-Russian.”

• Talking of inflation, my colleague Martin Wolf has an excellent tour d’horizon of the new world of elevated public debt that we have entered, and its potential inflationary impact. Almost every country’s balance sheet is getting worse. He ends with a plea for a co-ordinated global fiscal response, which he probably rightly dismisses as a pipe dream.

• Finally, do read this revelatory piece by Uri Berliner, a senior journalist at National Public Radio, on how that institution has lost the American public’s trust. It is a familiar and cautionary tale about how ideological takeover has distorted journalistic values and alienated the consumer. Every journalist should read this. 

• Finally, do read whatever you can of the latest issue of Foreign Policy, starting with the piece by its editor, Ravi Agrawal, on India. It comes ahead of what looks like a third consecutive victory for Narendra Modi’s BJP in the forthcoming elections — both an impressive feat and a depressing augury of the rise of illiberal elective autocracy. 

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Soumaya Keynes responds

Hi Ed,

First, I enjoyed your assessment that economists don’t know anything. Let’s keep expectations at that level, please.

As for the stubbornness of US inflation, I’ve also been unpleasantly surprised. I at least hoped that the predictions of “team long transitory” would prove correct, and that as the disruption of the pandemic finally faded, inflation would fall back to a comfortable 2 per cent. But although it’s true that prices of used cars and plane tickets have been falling, others haven’t behaved so helpfully.

Examples of areas where inflation has stayed stubbornly high include shelter and so-called “transportation services”, which includes car insurance. I briefly fell into a rabbit hole investigating whether the latter was because electric vehicles are more expensive to fix than their gas-guzzling predecessors. But I hauled myself out by reminding myself that there’s always a story about one particular sector. It’s safer to infer that the persistence of inflation is the outcome of deeper forces including surprisingly strong demand.

Of course, conditions could surprise us again in the coming months. Economists don’t know anything, remember?