In the run-up to the midterm elections, inflation is going to deliver a one-two blow to consumers and voters alike.
The first factor is the rate of inflation itself, which can be seen as an increase in consumer prices and is slowing down at a rate that is slower than what analysts had anticipated. The persistent increase in interest rates that is being done to bring inflation under control is the second blow, and it will have an effect on wallets as well.
This unfavorable mix may keep the least flattering economic reports on the front page, which raises the question of whether President Joe Biden and his administration prematurely declared victory over inflation.
A rise in interest rates will increase the monthly cost of credit card, auto, and mortgage payments, striking consumers where it hurts as they weigh their voting options in close races and prepare to cast ballots in November.
The Federal Reserve raised its target interest rate after a two-day meeting of the Federal Open Market Committee in Washington. The rise was announced to be 0.375 percentage points (or 75 basis points). The Fed is serious about managing inflation at whatever cost, as evidenced by this, the third consecutive rate hike of this magnitude.
For the sake of American households and companies, the Federal Reserve Board has both the resources we need and the resolution it will take to reestablish price stability, as Chairman Jerome Powell put it. During the next few months, we will be on the lookout for convincing evidence that inflation is declining, which is compatible with inflation reverting to 2%. According to our forecasts, further hikes in the target zone for the fed funds rate would likely be warranted."
Inflation was substantially higher than expected in August, with the index of consumer prices showing an annual rate of 8.3 percent. Because of this, additional rate increases before the elections were unavoidable.
That means the Fed's target interest rate range of 3% to 3.25% is the highest it's been since the 2008 financial crisis. This is an increase of 2.25 percentage points over the course of the previous four months as a result of the most aggressive rate-hiking that the United States has witnessed since the previous large wave of inflation was brought back under control in the 1980s. This effectively ended stagflation as a political issue for a generation.
The Democratic Party's two-decade reign was ended by the triple whammy of high interest rates, uncontrolled inflation, and poor economic growth. The Democrats won back the White House a decade later, in 1992, not because they promised more spending along the lines of the Great Society but because they emphasized low inflation and promised to encourage economic growth by lowering interest rates.
All of this ought to give Vice President Biden pause, given that he has presided over two consecutive quarters of declining economic growth and that inflation is currently at its highest level in 41 years. While he has advocated for a reduction in the federal deficit, he has also made it clear that he views substantial increases in domestic spending by the federal government as the cornerstone of his policy agenda.
As long as job growth continues unabated, it might be argued that we are not in a recession. However, we cannot promise that this trend will maintain. Inflation was finally tamed by the Federal Reserve, but the price was a recession that President Reagan had to weather before the 1982 midterm elections. Unemployment peaked at 10.8 percent.
Although future rate hikes certainly increase the likelihood of a downturn, Biden may be able to avoid the same fate. And even if Democrats manage to avoid the bullet this year, there is still a chance that a more severe economic slump would occur somewhere around the year 2024.
A "Mission Accomplished" moment with regard to inflation represents a more immediate threat to Biden. When asked by 60 Minutes about the inflation rate, he said it had risen by only an inch in the month that prompted the Fed to take its most recent moves and had been nil the month before.
The White House has made a habit of exaggerating the significance of any decrease in the price of gasoline. This is because the administration believes that the energy industry is the primary factor behind the recent decline in inflation. However, this has resulted in a significant understatement of the high pricing of other vital products, especially food.
On the same day that the 8.3% inflation number was announced, Vice President Biden and congressional Democrats had a celebration at the White House to celebrate the passing of the Inflation Reduction Act. Guests were treated to a performance by singer-songwriter James Taylor at the event. As the president, Senate Majority Leader Chuck Schumer (D-NY), and House Speaker Nancy Pelosi (D-CA) lauded their legislative handiwork, stock markets ended at nearly two-year lows. Many analysts are skeptical that the legislation can deliver on its promises to reduce inflation, at least in the short run.
Throughout the course of this year, concerns about inflation have consistently hovered close to the top of the public agenda, primarily to the disadvantage of Democrats. Now that interest rates might follow suit, it will be more challenging for Biden and his party to shift the subject.
The preceding is a summary of an article that originally appeared on Washington Examiner.