Inflation has not fallen anywhere near where the Federal Reserve hopes, and consumer sentiment is souring as a result — bad news for President Joe Biden, who is working to shore up support in an election year.
The economy is one of the biggest issues this election cycle. In past elections where the economy has featured prominently, the biggest concerns are usually jobs or unemployment or fear of a recession. This year, and for the first time in generations, inflation is the big concern.
The most recent inflation reading of the consumer price index, the most closely watched inflation gauge, showed that inflation fell slightly to 3.4% for the year ending in April. While the data showed a decline, that number is still well above the 2% level that the Federal Reserve considers healthy.
The small downtick also follows months of increases. Late last year, inflation began falling quickly, leading consumers to believe the price-growth plague was coming to an end and the Fed would begin cutting interest rates. But those expectations have faded greatly as inflation readings in 2024 continue to disappoint.
A day before the CPI data were released, the producer price index, which gauges wholesale inflation, rose slightly once again, the third straight monthly increase.
Republicans are squarely blaming Biden for the high inflation and, in turn, the higher interest rates. They contend that a rash of federal spending under Biden artificially juiced demand and caused prices to rise, an attack they have used and will continue to use on the campaign trail.
“This report confirms that the grip of inflation won’t loosen anytime soon, even after 11 interest rate increases since March 2022,” House Budget Committee Chairman Jodey Arrington (R-TX) said after the latest CPI report. “The massive amount of federal spending by President Biden and Democrats has made this inflationary firestorm difficult to contain.”
Perhaps even more crucially for Biden is how the hotter numbers are shifting inflation expectations and consumer sentiment, which is how voters feel about the economy.
The University of Michigan Consumer Sentiment Index plunged to 67.4 in May, down from nearly 77.4 in April, according to early numbers for the month. That marks a nearly 13% decline over just the past month alone and shows consumers are souring on the economy and their perceived economic conditions.
“This 10 index-point decline is statistically significant and brings sentiment to its lowest reading in about six months,” survey director Joanne Hsu said. “This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups.”
Year-ahead inflation expectations also rose, as did long-run inflation expectations, another troubling metric for the Biden campaign.
An April Bloomberg News-Morning Consult poll found that a mere 18% of registered voters predict that inflation will improve by the end of the year, while 75% said they think it will either stay the same or actually get worse. Further, 70% say the overall U.S. economy is going on the wrong track.
Additionally, the Conference Board’s consumer confidence index fell to 97 in April, down from a revised 103.1 the month before. That marks the lowest consumer confidence reading in 22 months.
The expectations index, which tracks the short-term outlook of consumers for business, income, and labor market conditions, fell to 66.4 this month from 74 in March. An expectations index reading below 80 often signals a forthcoming recession, according to the Conference Board, more alarm bells for Biden.
“Confidence retreated further in April, reaching its lowest level since July 2022 as consumers became less positive about the current labor market situation and more concerned about future business conditions, job availability, and income,” Dana Peterson, chief economist at the Conference Board, said.
Dan North, a senior economist with Allianz Trade Americas, told the Washington Examiner after the release of the most recent CPI report that while it ticked down by a tenth of a percentage point, inflation has remained in a narrow band between 3% and 3.7% for nearly a year now, more than a full percentage point over what the Fed considers healthy.
The Fed has raised its interest rate target from 5.25% to 5.50%, the highest since the dot-com bubble at the turn of the century. The biggest question now is when the Fed will start cutting rates, although recent hotter-than-anticipated inflation reports have increased the odds of fewer cuts in 2024. Most investors expect the first rate cut to come in September.
North said the latest report doesn’t do much to move the needle toward quicker interest rate cuts.
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“It’s not enough to move the Fed by any means off of, in our opinions, September. It’s a good thing it’s not a surprise to the upside, which we’ve had too much of, but we’re still a long, long way from 2%,” North said.
If inflation readings keep showing little progress toward moving inflation down to the Fed’s goal, it could also push back the first rate cut until after the November elections, something that would further hurt Biden. Higher rates make things like buying a home or taking out a loan much more expensive for voters.
