Why the Fall in Inflation Is a Big Deal for the 2024 Election

After the Labor Department announced last week that consumer-price inflation had fallen to an annual rate of three per cent in June, about a third of its rate a year ago, President Joe Biden hailed the drop, combined with a low unemployment rate, as “Bidenomics in action.” During 2021 and 2022, as problems with the global supply chain and the war in Ukraine caused prices to surge upward, many Americans held Biden personally responsible, and he has the political scars to show for it. (According to the RealClearPolitics poll average, his economic approval rating stands at 38.4 per cent.) As inflation falls back, then, the President is surely entitled to claim some of the credit, especially since his Administration’s actions—working to resolve the backlogs at America’s ports, releasing part of the strategic petroleum reserve, and imposing a price cap on Russian oil—have all likely contributed to the recent numbers.

In the coming months, there may well be more positive news for the White House. A slowdown in housing costs and the price of used cars should get reflected in the official inflation data, including the core Consumer Price Index, or C.P.I., which the Federal Reserve monitors closely because it excludes volatile energy and food prices. “We appreciate that much can go wrong with inflation forecasts, even just a couple months ahead, but you don’t need to make any wild assumptions and cross your fingers in order to generate startlingly low core CPI prints over the summer and into the early fall,” Ian Shepherdson, the chief U.S. economist at Pantheon Macroeconomics, wrote in a client circular last week. In July and August, the core C.P.I. could increase by as little as 0.1 per cent each month, Shepherdson told me, and if this were to happen, he added, the core rate of annual inflation would fall from 4.8 per cent in June to 4.1 per cent in August.

With the inflation outlook improving more rapidly than many economists expected, the White House is increasingly sure it can avoid something that all Presidents seeking reëlection fear: an election-year recession. On Monday, the economics team at Goldman Sachs put the probability of a recession in the next twelve months—that is, a broad-based slump in spending, employment, and G.D.P.—at just twenty per cent. “The recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” Jan Hatzius, the chief economist at Goldman, said.

In a television interview over the weekend, Jared Bernstein, the chairman of Biden’s Council of Economic Advisers, pointed to falling inflation, continually strong job growth, and healthy consumer demand as evidence of the economy’s strength. “Forecasting can be a challenging game,” Bernstein said, echoing Shepherdson, “but I do look at that kind of momentum, and I like where we are.” The situation is certainly very different from the start of this year, when the inflation rate was at 6.4 per cent, and the conventional wisdom among economists was that the Federal Reserve would need to engineer a significant rise in the unemployment rate to bring inflation down toward its target of two per cent. To use the aeronautical metaphor that economists love, many of them believed that the economy was heading for a hard landing. Since then, the rate of inflation has fallen by more than half, while the jobless rate has edged up only two-tenths of a point, from 3.4 per cent to 3.6 per cent.

For those economists who said that a big rise in the unemployment rate would be required to significantly reduce inflation, the latest numbers are an embarrassment. But for Biden and the rest of the country, they’re a welcome development. The news suggests that the Fed is almost done raising interest rates, and that the economy is heading for a soft landing rather than a hard one. What politicos want to know is whether the positive economic news will turn around Biden’s dismal poll numbers. My guess is that there will be some improvement, but it will be gradual. As I’ve pointed out before, there is evidence that voters have been responding primarily to the level of prices, not their rate of change, which is what inflation measures. Even as the inflation rate falls sharply, the cost of many items remains a good deal higher than it was when Biden came to office. Take, for example, a humble staple in the family budget: a carton of a dozen eggs. Figures from the Labor Department show that between January and June, its average price fell from $4.82 to $2.22. That’s a dramatic drop. But egg prices are still about fifty per cent above their January, 2021, level.

The rise and fall in egg prices was primarily caused by an avian flu, which even the House Republicans might have difficulty pinning on Biden. But we are talking politics here, not economics, and it is an open question whether people will focus on recent price drops or previous price hikes. One development that should unambiguously benefit the White House is the fact that, with inflation down to three per cent, average wages are now rising faster than prices. In the past twelve months, Bernstein said, production and non-supervisory workers, who make up more than two-thirds of all non-farm employees, have seen their inflation-adjusted wages rise by 1.6 per cent. To be sure, that’s not a huge jump, but it represents a drastic change from the previous twelve months. If it continues, Americans should gradually feel better about the economy.

There are also signs that the recent economic news is finally prompting a shift in the media narrative, especially in broadcast media, which for the past two years has been relentlessly negative. Going forward, this may give Biden the political space to make the case for his legislative record, which includes the 2021 American Rescue Plan Act and the 2022 Inflation Reduction Act, without being constantly assailed with cries of “Did you see the price of X?” Of course, this doesn’t mean that the voters will buy Biden’s pitch; as Bernstein pointed out, “Americans have been through a ton.” Nonetheless, it represents an important change. Even if economic factors no longer dominate Presidential elections in the way that they once did, they help set the basic narrative for campaigns. And right now that narrative is shifting in favor of “Bidenomics” rather than “Bidenflation.” ♦