The booming economy is exacerbating a key vulnerability for President Biden at the height of the campaign season, as inflation and interest rates could remain higher well into the final weeks of the presidential election.
New data this week shows inflation picked up again in March, the latest sign that the economy is overheating. Unexpectedly strong job growth, wages and consumer spending are a positive for most Americans, but bad for inflation. The higher inflation reading makes it more likely that the Federal Reserve will keep interest rates – and mortgage rates – high through the end of the year, perhaps days after the election, which won't represent a major political win for Biden.
“It's really a case of bad luck,” said Karen Dynan, a Harvard University professor and former Treasury Department chief economist. “The Biden administration has made some great progress, but it is dealing with one of the most disruptive economies in decades. Rate cuts would be a welcome development for many people, but the prospects for rate cuts have really changed given the direction of inflation.”
Gasoline prices, in particular, have always played a large role in how Americans think about the economy. According to AAA, the average gallon of gasoline has risen over the past two months to $3.63 a gallon as of Friday. Fears of rising prices may already be weighing on Americans again as consumer sentiment fell unexpectedly in April, according to a University of Michigan survey released Friday.
A booming economy can fuel inflation when spending is so high that consumers are willing to pay ever higher prices for goods and services. Consumer spending accounts for two-thirds of the U.S. economy, and despite inflation, Americans have so far been more than happy to opt for services like dining out, travel and hotel stays. This forces companies to hire more employees – and raise wages – which in turn drives prices even higher.
Biden advisers point out that the current inflation reading of 3.5 percent is below what it was at similar points in the administrations of President Bill Clinton and President Ronald Reagan, when year-over-year inflation was 3.6 percent and 4 percent, respectively .8 percent. Both won re-election.
“Our goal to reduce costs for working families is as urgent today as it was yesterday,” said Jared Bernstein, chairman of Biden’s Council of Economic Advisers. “We’re just going to keep our heads down and keep fighting to lower costs, from prescription drugs to junk fees to housing and child care.”
For much of his presidency, Biden has struggled with his message on the economy. When inflation first hit the country in the months after the pandemic, the president and his team decided to call it “transitory,” signaling to voters that the surge was temporary and would subside. When Russia invaded Ukraine, the White House began using the phrase “Putin's price hike” and blaming the war for rising gas prices.
As inflation fell, Biden tried to rebrand “Bidenomics,” originally used derisively by conservative media outlets to win voter credit for a booming job market and growing economy. But while economists struggled to explain the turbulent economy in the wake of the coronavirus crisis, Biden also struggled.
The president and his aides were frustrated that they were not getting more credit for avoiding a recession and passing major legislation, notably the Infrastructure Act and the CHIPS Act, transforming America's roads and bridges and boosting a domestic semiconductor industry become. There is disagreement among advisers over how to sell Biden's legislative achievements at a time when many Americans say they are struggling to afford groceries and other household items.
That dispute came to public attention this week after Politico published an audio recording of former White House chief of staff Ron Klain, who remains close to Biden, criticizing the White House's economic messaging. During a conference, Klain said Biden was spending too much time touting new bridges and not enough time on rising prices.
The White House says Biden can and must do both.
“He understands what Americans are facing,” White House press secretary Karine Jean-Pierre told reporters this week when asked about Klain’s comments. “And he's talked about cost cutting at almost every event he's hosted around the country after the State of the Union, how important it is and how there's still a lot of work to be done. You hear that.”
Now, with inflation rising again, the White House is under renewed pressure to allay Americans' economic fears. Stock markets plunged this week as investors realized a rate cut was no longer imminent.
Bank of America said this week that it does not expect the Fed to begin cutting interest rates until December, six months later than originally forecast. “We no longer expect policymakers to gain the confidence they need to begin austerity measures in June,” Michael Gapen, the bank’s U.S. economist, said in an analyst note. She also assumes that the Fed will cut interest rates less than previously assumed.
The president took the unusual step this week of commenting on the Fed's next move, saying he stands by his forecast that the central bank will cut interest rates by year's end. Biden has generally been careful to keep his distance from the Fed and said he respects the central bank's independence.
In a twist, the election itself could delay the Fed's plans. Investors generally expect the central bank to refrain from making policy changes ahead of the presidential race, fearing it could favor one candidate over another.
“It's hard to imagine the Fed cutting interest rates aggressively before November,” said Glenn Hubbard, a professor at Columbia Business School and an economic adviser to President George W. Bush. “I just don’t see it – it’s not a political judgment, it’s just arithmetic.”
Inflation, which peaked at 9.1 percent in June 2022, has fallen dramatically since then, with significant declines in nearly all categories of goods and services. In some cases, expensive items like cars, furniture and appliances have actually become cheaper over the past year.
But in recent months progress has stalled. Inflation picked up in March – prices rose 3.5 percent year-on-year, compared to a 3.2 percent increase the previous month. A number of basic items – including car insurance, women's coats, pork chops and vet visits – were about three percent more expensive than in February.
Chad Barrett, 36, who owns a solar panel company in West Palm Beach, Florida, says inflation and high borrowing costs have forced him to reconsider his vote for Biden. Barrett, a lifelong Democrat who once campaigned for Sen. Bernie Sanders (I-Vt.), plans to cast a “protest vote,” either for a third-party candidate or for a write-in candidate.
Until this week, Barrett had hoped the Fed would begin cutting interest rates in the next few months, providing some relief. But that seems unlikely now – meaning he's already receiving notices from lenders that his borrowing costs will soon rise.
“All I hear is, 'This economy is great, it's amazing,' but I'm a millennial who doesn't own a home and everything is getting more expensive,” he said. “It’s a mix of disappointment and frustration.”
In his rematch against former President Donald Trump, Biden has increasingly sought to compare his economic record with Trump's.
“We're in a situation where we're in a better position than we were when we came into office, when inflation was skyrocketing,” Biden said at a news conference on Wednesday. “And we have a plan to deal with this while the opposition – my opposition – is talking about two things. They just want to cut taxes on the rich and raise taxes on other people. And I don't think they have a plan. In my opinion, our plan is still viable.”
However, as the president finds it difficult to establish himself in the economy, his campaign is focusing on the issue of abortion. Democrats have enjoyed electoral success since the Supreme Court handed down Roe v. in 2022. Wade repealed, and they are spending millions of dollars reminding voters that Trump was the architect of that decision. As states across the country adopt even more restrictive abortion bans, Democrats are optimistic that the issue will be more important than the economy to core Democratic voters, but also to potentially dissatisfied Republicans.
In Fultonville, NY, Pam Marshall and her community have been hit hard by rising prices. But the single mother who left the Republican Party after the Jan. 6 attack says abortion rights take precedence over economic issues. She wants to vote for Biden in November.
“Everyone here has problems — I give money to my son and his family, I see people lining up at the food bank,” said Marshall, an IT project manager. “But we need a functioning government.”
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