The hotter-than-expected inflation data could prove to be a problem for President Joe Biden and his economic philosophy, known as Bidenomics, heading into the November election.
The annual inflation rate topped the consensus estimate for the fourth consecutive month, rising to 3.5 percent in March, according to data from the Bureau of Labor Statistics. The consumer price index spotlighted broad-based inflationary pressures, highlighting increases in a wide range of goods and services, from gasoline to shelter to auto insurance.
Stocks tanked and Treasury yields rocketed on the notion that the Federal Reserve could delay its first rate cut again.
When a reporter asked President Biden during a joint press conference with Japanese Prime Minister Fumio Kishida on April 10 whether he still anticipates that the central bank will pull the trigger on a rate cut this year, he explained that he stands by this prediction. However, according to the incumbent, the March inflation figures “may delay it a month or so.”
“We don’t know what the Fed is going to do for certain,” President Biden said.
Monetary policymakers are stuck between a rock and a hard place. After starting the institution’s quantitative-tightening program in March 2022—a blend of rate hikes and balance-sheet reductions—the Fed has tried to cool off the red-hot post-pandemic economy and engineer a soft landing.
Today, economic growth remains intact, and the labor market continues to be solid, while inflation continues to be far above the Fed’s 2 percent target.
President Biden insists the U.S. economy is “better situated” than under his predecessor, when “inflation was skyrocketing.”
When he took office, the annual inflation rate was 1.4 percent and soared to a peak of 9.1 percent in June 2022.
“We have a plan to deal with it, whereas the opposition—my opposition—talks about two things,“ he told reporters in the Rose Garden. ”They just want to cut taxes for the wealthy and raise taxes on other people. And so I think they have no plan.”
He said that his administration has “more to do to lower costs for hardworking families,” touting his economic agenda that aims to reduce prices for health care and prescription drugs, cancel student debt, and remove hidden junk fees.
President Biden acknowledged that housing has been another inflation driver.
Shelter costs jumped by 0.4 percent in March and are up 5.7 percent compared with the same time a year ago. In addition, the median sales price of homes has gone up 13 percent since January 2021, totaling $417,700 as of the fourth quarter in 2023, according to the Census Bureau.
Inside the president’s annual budget proposal, the White House has targeted housing affordability by addressing supply shortages. The budget requests about $258 billion to construct and renovate more than 2 million homes. It also outlined several tax credits, including a $10,000 tax credit to encourage homeowners to put their starter properties on the market and a $10,000 refundable credit for middle-class homebuyers.
Kitchen Table Politics
Inflation is still on the top of voters’ minds.A March 2024 Gallup survey showed that 55 percent of Americans worry “a great deal” about inflation, and 24 percent say they worry about it “a fair amount.” More than half (52 percent) say they worry about the economy “a great deal.”
Despite the current administration’s marketing plan to bolster the Bidenomics record, voters still largely disapprove of President Biden’s handling of the economy.
A recent Economist-YouGov poll showed that 52 percent disapprove, and the latest Fox News survey highlighted a 61 percent disapproval rating. The Real Clear Politics average shows that 58 percent disapprove of the incumbent’s economic record.
Households nationwide have endured sky-high prices. Since January 2021, cumulative inflation has been more than 19 percent, with a wide array of goods and services becoming more expensive, whether at the grocery store or the gasoline station.
Over the past three years, fuel oil has surged by 60 percent, motor vehicle insurance has soared by 50 percent, baby food has climbed by 30.5 percent, and breakfast cereal has risen by 20.5 percent.
To fund discretionary and non-discretionary purchases, consumers depend on credit cards with record-level interest rates attached. Total U.S. credit card debt is $1.3 trillion, and the delinquency rate has increased to a decade high.
Administration officials and market observers will pay close attention to consumer sentiment surveys. The next one will be on April 12, when the preliminary April University of Michigan Consumer Sentiment Index is released. In March, this gauge advanced to the highest level since July 2021. Experts expect little change in the April reading.
The Federal Reserve Bank of New York’s March Survey of Consumer Expectations (SCE) also offered a mixed picture of household opinions.
Looking at Interest Rates
Like Wall Street, President Biden will wait to see whether the Fed loosens monetary policy conditions that would effectively trim borrowing costs for businesses and consumers.At the Federal Open Market Committee (FOMC) policy meeting in December 2023, officials signaled that they were preparing for three rate cuts in 2024, according to the Summary of Economic Projections. Despite inflation revival concerns within the monetary organization, the Fed has stuck with its forecast for three quarter-point rate cuts.
The monetary authorities were somewhat confident that services inflation would soften amid the loosening of labor conditions. However, the annual services inflation rate rocketed to 5.3 percent. Plus, the Fed’s preferred index of core inflation, which assesses services excluding housing, advanced by 0.7 percent monthly, the largest increase since September 2022. The metric is also up 5 percent year over year, and the three-month annualized change has exceeded 8 percent.
Several Fed officials have conceded that cutting interest rates would be premature amid a trifecta of high inflation, vigorous growth, and an unemployment rate below 4 percent.
Atlanta Fed President Raphael Bostic told CNBC last week, “There are some secondary measures in the inflation numbers that have gotten me a bit concerned that things may move even slower.”
“Those are much higher now than they were before, and they’re starting to trend back to what we saw in the high inflation period,” Mr. Bostic said. “They’re moving away from what we’d like to see. So I’ve got to make sure that those aren’t hiding some extra upward pressure and pricing pressure before I’m going to want to move our policy rate.”
Even the financial markets have cooled their expectations over interest rates amid sticky and stubborn inflation. Investors are now penciling in two quarter-point rate cuts this year beginning in September. This is down from six rate-cut projections heading into 2024.
At this stage, it is a balancing act, economists have said. On the one hand, if the institution keeps interest rates higher for longer to fight inflation, officials threaten to break the U.S. economy. On the other, a premature rate cut could further fuel another inflation wave.
Surprise or No Surprise?
The next two-day FOMC meeting might be critical for Wall Street and Main Street. Indeed, the Fed is not expected to pivot on monetary policy, so markets will monitor what Fed Chair Jerome Powell tells reporters at the post-meeting press conference.In recent public appearances, Mr. Powell has acknowledged the higher-than-expected inflation prints.
“We tend to see a little stronger inflation in the first half of the year and a little less strong later in the year,” he said in March. “We are going to let the data show. I don’t think we really know if this is a bump in the road or something more. We'll have to find out.”
According to minutes from the FOMC meeting in March, participants expressed concerns surrounding the upside risks to inflation and that the recent uptick in inflation “should not be discounted as merely statistical aberrations.”
Following his interview with Bloomberg TV, former Treasury Secretary Larry Summers took to social media platform X to say that the recent increase in inflation “should not be a surprise to anyone.”
“In an economy that’s growing faster than potential, with an unemployment rate that has a three handle in the presence of massive and growing budget deficits and especially easy financial conditions, the idea that inflation would remain robust or even accelerate should not be a surprise to anyone,” he said.
“And that’s what today’s data suggests.”
Should these trends persist and financial conditions loosen even more, could the talk of the town be a possible rate hike?
Yardeni Research has said the Fed raising the benchmark policy rate again could become a talking point, though the crowd is small at this point.
“We expect to be hearing this question more often following today’s hotter-than-expected [consumer price index] inflation report,” it said in an analyst note.
The next FOMC meeting will take place on April 30 and May 1.
