August Inflation Should Scare Democrats

The economy is looking quite hazardous. November may be a comeuppance.

President Joe Biden delivers remarks on the Inflation Reduction Act of 2022 at the White House, in Washington, on July 28, 2022. (Elizabeth Frantz/Reuters)

Commentary

August headline inflation printed at double the market expectation (+0.1 percent predicted vs. -0.1 actual), or 8.3 percent for the 12 months through August, unadjusted.

On Sept. 13, the Dow Jones Industrial Average closed down more than 1,270 points, or nearly 4 percent. The benchmark S&P 500 Index fell more than 4 percent and the NASDAQ more than 5 percent. Industrials and technology seem to be leading the downturn, as investors anticipate a market slide from the “technical” recession and margin pressure. Markets fully expect an interest-rate hike of at least 75 basis points (bps) when the Federal Reserve’s policy-making arm, the Federal Open Market Committee (FOMC), meets next week; some speculate it will go even higher.

The inflation figures released on Sept. 14 came just a month after President Joe Biden signed a law with a name only George Orwell could have imagined, given the circumstances: the Inflation Reduction Act.  But both the Congressional Budget Office and the prestigious Penn Wharton Budget Model determined that the new law would have a negligible effect on inflation, while adding about another $435 billion of new spending on climate measures and expanded Affordable Care Act subsidies. Both models estimated a deficit reduction of between $250 billion to around $300 billion, due mostly to tax increases, which is not the best policy when in a recession. Notwithstanding today’s inflation number, and the worst sell-off since June 2020, at the height of the pandemic, the White House saw fit, on Sept. 13, to laud the new law in ceremonies featuring James Taylor.

The Ugly Details Behind the Headline Numbers

Wall Street’s legacy media tend not to look beyond the headline numbers in economic data releases. On Sept. 13, numerous outlets simply reported that “inflation was down, but not as much as hoped,” or some variation of that theme, and moved on.

But while today’s inflation figure is, indeed, down from July, that is only because gasoline prices fell. Gasoline prices fell, in turn,  because we’re in a recession, and President Biden has drawn down the Strategic Petroleum Reserve to its lowest level since 1984. Recall that in April 2021, when gasoline prices crossed the threshold of $3 per gallon, the president tapped the reserve under the guise of what he called “Putin’s price hike,“ owing to the war in Ukraine. Notably, the rate of draw-down appears to have increased markedly in the year prior to this November’s midterm elections.

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But almost every other expense of daily living—groceries (up 13.5 percent, year over year); electricity and piped gas (up 19.8 percent), transportation (up 11.3 percent)—were up double digits, year over year. Housing was up nearly 7 percent.

Why Democrats Should Be Scared

While the economy seemed to many as though it was looking up last week, as reflected in the IBD/TIPP Poll taken that week, that confidence was optimistic. Americans are still struggling to pay for food, fuel, and utility bills. Six percent of American households—3.5 million people—are “very likely” or “somewhat likely” to be evicted, according to Census Bureau data collected in August, with 1.5 million households three months or more overdue in their rent.

We predict that companies will face stiff margin pressure and demand destruction, simply because people aren’t able to afford things, particularly consumer discretionary items outside basic necessities. That will cause further losses in the markets and pressure on companies to reduce costs, including calls for layoffs. There’s also some concern that the nation’s railway workers may strike, further affecting supply chains.

With less than 60 days to the November midterms, we expect people will “vote their pocketbook” and  move toward a Republican Congress.

They'll be looking for a change in November 2022 and, likely, in 2024, too.