Yahoo Finance This week in Bidenomics: Post-midterm relief
President Biden was hoping for a break on inflation before the midterm elections on Nov. 8. Instead, it came two days later. Better late than never.
The annual pace of inflation slowed from 8.2% in September to 7.7% in October. That’s still too high, and key essentials such as food and transportation are rising by more. But economists now see clear signs that inflation has peaked and will probably continue to decline to normal levels.
“Disinflation begins in earnest,” Capital Economics said in a Nov. 11 analysis. “The October report showed the widespread disinflationary pressure evident in other private-sector measures finally feeding through.” Disinflation is a decline in the rate of inflation, while overall inflation remains positive. Deflation is a decline in prices, or negative inflation, which has generally not yet occurred, but could.
For Biden, high inflation has been a political issue, since it sours voters on the incumbent leadership—him—and gives Republican critics potent ammunition to fire his way. Yet the Democrats’ over-performance in the midterms suggests inflation and a slowing economy haven’t hurt Biden as much as just about everybody expected.
Once all the votes are counted, Democrats will probably lose control of the House, but by a much smaller margin than nearly all election forecasts predicted. Exit polls show that abortion and election-security concerns were a bigger factor among voters than earlier polls suggested, with the economy being slightly less of a concern. Maybe voters had a sense that inflation was already receding, or they found solace in the sharp drop in gas prices since they hit $5 per gallon in June.
The improving inflation outlook is also a huge relief for investors, of course, mostly because it influences how high the Federal Reserve will push interest rates. There have been several false rallies in the stock market since the summer, when traders guessed that forthcoming inflation data would show notable improvements that would allow the Fed to back off. Those fizzled when inflation data came in hot instead. But markets now seem to think we’ve turned the corner for good, with the S&P 500 and NASDAQ indexes ripping higher on the October inflation data.
Price declines on the horizon
We may soon see outright price declines—deflation—in some categories. Most people understand inflation on a year-over-year basis, and the 12-month change in the price of most things is still positive, even as the inflation rate has moderated. On a month-to-month basis, however, some things are getting cheaper, which will eventually show up as year-over-year price declines, and help bring the overall inflation rate lower still.
[Follow Rick Newman on Twitter, sign up for his newsletter or sound off.]
The price level for used cars fell 2.4% from September to October, which is the second-biggest drop since 2003. Used car prices spiked earlier this year, as a shortage of microchips for new cars caused an acute production shortfall, forcing many new-car buyers into the used market. The chip shortage is easing, which means car prices will normalize. As Moody’s Analytics points out, a drop in used-car prices usually foretells a drop in new-car prices a couple months later.
The average price of a home, measured by the S&P/Case-Shiller index, has dropped for two consecutive months, for a total decline of 1.5% from June to August, the latest data available. Home-price deflation probably has a lot further to run. Prices are just starting to fall as soaring mortgage rates, triggered by the Fed, price out buyers and depress demand. The huge runup in prices from April 2020 to June 2022 was undoubtedly a bubble fueled by record-law rates and COVID-induced property buying, so a price correction makes sense. It will take time, however, for a decline in home prices to flow through to rents and other housing-related costs.
The end of the midterms brings a sense of relief, as heated political rhetoric dies down and campaign-related stunts subside. The next several months could still be a slog, however. Grocery costs remain abnormally high, with annual food inflation running at 12.4%. Energy prices are high and could bolt higher over the winter as Russia and the West continue to conduct an energy war in parallel to the military war in Ukraine. Many economists think a recession will hit in 2023, though it would probably be a mild one.
Biden can take a breather, with less of a need during coming months to persuade voters that he’s bringing inflation down and presiding over an otherwise solid economy. The following year, in fact, could be helpful for Biden and the Democrats, if inflation recedes and a mild recession helps restore balance to messed-up supply chains and other parts of the economy still distorted by the COVID pandemic.
By the time we get to the 2024 elections, Democrats might have a pretty good economic story to tell. But let’s relax for a while before we start talking about the next political races.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
Click here for politics news related to business and money
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube
