This week in Bidenomics: Into the dunk tank
President Biden is just going to have to take his lumps for a while.
Many aspects of the economy are doing great. There are tons of jobs available, and the unemployment rate has plunged since Biden took office in January. GDP growth could hit 7% in the fourth quarter and 5% or more for the whole year.
But: inflation. This is the biggest economic story for the time being, and that will probably be the case for at least a few more months. President Biden told Americans in July that inflation was likely to be “temporary.” At the time, the annual inflation rate was 5.3%. It’s now 6.8%, the highest level in 39 years. Since Biden predicted inflation would pass, it has only gotten worse.
This is also the kind of inflation ordinary consumers feel every day. Food costs are up 6.4%, and clothing 5%. Transportation costs have risen 22%, driven by gas prices, which are up 58% during the last year. Rents have been stable, but are still creeping up by 3%. Wages, meanwhile, are rising by 4.8%, which would be pretty good most of the time—but now, it’s 2 percentage points lower than inflation. That means typical workers are falling behind.
These grim numbers are more than enough ammunition for Biden critics eager to paint his policies as harmful to ordinary Americans. “Inflation is out of control on the Democrats’ watch,” Republican Senate Minority Leader Mitch McConnell said in a Dec. 10 statement. “It is exactly what experts warned Democrats’ reckless spending would cause.”
That’s hyperbole. The only Democratic spending package that has even gone into effect is the $2 trillion Covid relief bill from March. That may have had a modest impact on inflation, by giving some consumers more money to spend and boosting demand. But that wouldn’t explain a 4-point increase in prices since then. The real reasons are mostly beyond Biden’s control, and familiar by now: Spending patterns shifted during the Covid pandemic, with consumers wanting more goods and fewer services. That happened at the same time supply-chain disruptions were making it harder to get goods to market. Those factors still persist.
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Inflation might not be Biden’s fault—but it’s certainly his problem. Democratic Sen. Joe Manchin of West Virginia has cited inflation concerns as a reason to trim and possibly delay the Build Back Better legislation Democrats hope to pass by the end of the year. This is Biden’s marquee policy package, with historic investments in social programs and green energy. It’s already a tough sell, with Manchin and a couple other moderate Democrats in the Senate effectively holding veto power over the bill. Manchin’s inflation worries could delay passage until next year or kill the bill completely.
Worsening approval rating
Biden’s approval rating has also tanked as inflation has worsened, falling from 52% in July to 43% now. The chaotic U.S. pullout from Afghanistan helped trigger the drop, but Americans tend to forget overseas misadventures. They won’t forget inflation as their food and energy bills climb.
The problem may not last forever. Some economists think the November number could represent peak inflation, with prices staying uncomfortably high but rising slower in 2022. Oil and gas prices have already dropped from the levels reflected in November’s inflation report. Gasoline, which hit about $3.40 per gallon in early November, could fall back to $3 per gallon by the end of the year, Moody’s Analytics predicts.
“Although we think headline inflation has now peaked, it will decline only gradually over the first half of next year,” Capital Economics said in a Dec. 10 research note. If that pans out, it means the Federal Reserve will tighten monetary policy and raise interest rates more aggressively than Fed officials suggest just a few weeks ago. Markets seem to be pricing that in.
A gradual decline in uncomfortably high inflation also means there may be no moment when Biden can claim convincingly that he whipped inflation. If the inflation rate slowly drops to 5%, for instance, that would be better than it is now—but still too high for many voters. Some Democrats are already making the mistake of declaring victory when gas prices, for instance, fell by just a few cents. Voters aren’t that dumb.
The Biden White House is clearly frustrated. Some White House officials are starting to blame the press for being unfairly critical of Biden, citing a recent Washington Post analysis claiming media coverage of Biden during the past four months has been worse than that of Biden’s predecessor, Donald Trump. Aww. Prices are soaring, voters are pissed and Biden can’t get a break! Instead of complaining about it, Biden might be better off biding his time. He’s going to get beat up for the next few months. If he shows he can take it, voters might be more receptive when there’s finally a better story to tell.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.
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