Everyone wants inflation to end. For a while, there seemed to be hope. However, the eavesdropping door cannot be completely closed.
April 26 brought the latest of several signs that inflation is picking up again. Personal consumption spending, a measure of inflation closely monitored by the Fed, rose to an annual rate of 2.8% in March, slightly higher than expected. Another important indicator, the consumer price index, has risen over the past two months, with inflation currently at 3.5%.
Inflation peaked at 9% in June 2022, but declined sharply over the next year, reaching a cycle low of 3.1% in June 2023. This looked promising for President Biden’s re-election prospects. The worst economic disaster of his presidency appeared to be quickly fading away.
But it didn’t go away.Inflation is Has been in the low 3% range for the past 9 months, well above the Federal Reserve’s goal of 2%. Stubborn inflation will have important implications for the remainder of 2024.
If inflation had continued to decline from the end of 2023 to 2024, it would have basically reached normal levels by now. In early 2024, investors are betting that with inflation subdued, the Fed may start lowering interest rates in the first half of the year, providing some relief to car and home buyers who finance their purchases with loans. thought to be very high. It currently looks like any interest rate support won’t materialize until the fall at the earliest, and probably after the November election.
Biden may have an even deeper problem. Inflation continues because consumers are generally in good health and willing to spend money. As a result, demand is strong and prices continue to rise. Economic output rose at an annual rate of 1.6% in the first quarter, weaker than expected but still positive. And unsustainably high GDP growth continued in the second half of 2024.
Goldman Sachs was sufficiently impressed by this economic news to set a solid 3.5% GDP growth target for the second quarter. Some election models suggest that strong economic growth in the second quarter of an election year almost always coincides with reelection of an incumbent president seeking a second term.
Biden’s outlook is even more uncertain. Most economists still think the recent surge in inflation will eventually subside. There are two categories that are causing most of the inflation at the moment: auto insurance and rent. Premiums will eventually stabilize, and the calculation of rent inflation slightly overstates reality. That’s because they underestimate how many people will sign new, cheaper leases. Basically, there is no more commodity inflation, and some products are starting to become cheaper.
Leave a note for Rick Newman, Follow him on Twitteror sign up for his newsletter.
However, the Fed has made clear that it will not cut interest rates until it is confident that inflation has truly been eliminated. And it hasn’t gone away yet. As a result, interest rates could remain where they are for several more months, until voting day in November.
Interest rates are not at historically high levels. In fact, they are close to historical standards. But the bar is much higher than it has been recently, and is the standard of comparison when many people ask whether they would be better off under a Biden administration.
Headlines like this certainly don’t help the president. ”Mortgage interest rates hit new high“Or this:”Home purchase costs hit an all-time high” According to one study, this is due to a combination of high housing prices and relatively high financing costs. Recent reports from Redfin. These hurdles make Americans skeptical that economic growth and employment statistics are actually as good as they show.
Fading hopes for a rate cut also disrupted the stock market’s wild rally that began last October. The S&P 500 (^GSPC) hit a new high in March, but has since fallen about 3% due to rising bond rates. Stocks fell on signs of persistent inflation, but are rising again as investors think it can’t be that bad. Although the stock market doesn’t actually predict who will win the presidency, rising stock prices are making many Americans feel better.
The question for Mr. Biden is where the fight against inflation will stand in September and October, when voters sitting on the last fence in a close race will decide who to support and whether to vote at all. The earliest possible Fed rate hike currently appears to be in September. If that doesn’t happen, it won’t happen until after the election.
Biden may not need the Fed’s help cutting rates. Interest rates could fall on their own if optimistic investors again think a rate cut is imminent and factor in future Fed action. If corporate earnings are strong and the Fed remains silent, stock prices could continue to rise.
Perhaps what Biden needs is to convince most voters that inflation is gone for good. And it’s…not completely…yet…the persistent unwelcome visitor may still pull a little prank.
Rick Newman is Yahoo Finance. Follow him on Twitter @rickjnewman.
Click here for political news related to business and monetary policy that will determine tomorrow’s stock prices.
Read the latest financial and business news from Yahoo Finance
