“It’s going to be a slog.” Returning inflation to normal is a challenge for the economy and a problem for Biden.
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Lowering the key metric from a four-decade high of 9.1 percent inflation last summer to 3 percent in June this year was the easy part, economists said. Overcoming the so-called “last mile” to the targeted 2 percent level will be much more difficult, with new obstacles such as a temporary rise in gas prices complicating efforts.
“The 9 percent increase to 3 in June was a straight line that felt really good. That made it easy for political leaders to make the case,” said Mark Zandi, chief economist at economic research and consulting firm Moody’s Analytics. “But going from 3 to 2 will be much more difficult. It’s going to be a grind.”
This is bad news for Biden’s re-election campaign. In recent weeks, he has celebrated the sharp decline in inflation in speeches and in his new TV ad, part of a $25 million advertising campaign aimed at voters in Arizona, Georgia, Michigan, Nevada and other battleground states .
“They said millions would lose their jobs and the economy would collapse. But this president has refused to let that happen,” the narrator says over images of closed businesses and falling stock market headlines, before listing some of Biden’s economic initiatives. “Today inflation has fallen to 3 percent and unemployment is the lowest in decades. There is more work to be done, but President Biden is delivering results that matter.”
Biden campaign spokesman Kevin Munoz would not say whether the ad, which had to be prepared in advance, would be changed. However, he cited the Democrats’ better-than-expected performance in last year’s congressional elections as evidence that Bidenomics is working.
“Next year’s election will be a difficult choice between President Biden and the extreme, unpopular MAGA agenda,” Munoz said. “We will win in 2024 by putting our heads down and doing the work, not by fussing about polls.”
Biden and senior administration officials launched a massive effort this summer to tour the country and highlight improving economic conditions as evidence of the success of his policies, dubbed “Bidenomics.” He even boasted that Republicans might need to find a new line of attack after months of criticizing him for causing so-called Bidenflation with increased government spending.
But a spike in gas prices this summer, driven in part by production cuts in Saudi Arabia and the extreme heat that crippled U.S. refineries, has made this case a more difficult proposition. Gasoline prices play an outsized role in Americans’ view of the economy, and consumer confidence, which had trended higher in recent months, fell in August as prices at the pump rose.
Biden’s standing in the polls has also suffered.
A CNN poll released Thursday found that 39 percent of adults approved of Biden’s job performance, compared to 41 percent in July. About 58 percent of respondents said Biden’s policies had worsened the country’s economic situation, compared to 50 percent in a CNN poll last fall. A key reason for the change is that nearly twice as many Democrats – 24 percent – held that view compared to the previous poll. More independents also did so, 59 percent compared to 50 percent.
“There is no question that Biden is not yet where he wants to be economically. And it’s important. This is important,” said Democratic strategist Simon Rosenberg, who emphasized that the election campaign is still in its early stages. “He needs to continue to make his case, and he needs to make a compelling case.”
Inflation is still well below its peak last year, which Rosenberg said was due to the rise in oil prices following Russia’s invasion of Ukraine. Biden delivered record job creation, which has slowed in recent months but remains solid (although unemployment is no longer the lowest in decades). Employee wages have been exceeding inflation for several months. And the economy continues to grow at a decent rate, making economists more optimistic that the U.S. will avoid the recession they feared the Fed would trigger with its aggressive interest rate hikes to combat inflation.
Fed Chairman Jerome Powell remains steadfast on reducing inflation to what he considers normal – an annual rate of 2 percent that some economists say is outdated and should be set higher. And he acknowledged the process “will likely be bumpy.” August was one of those shocks, economists said.
Gas prices hit their highest seasonal level in more than a decade last week. The national average for a gallon of regular gasoline was $3.81 on Friday, about five cents higher than a year ago, according to AAA. The price in Massachusetts was $3.74 a gallon last week, compared to $3.87 a year ago.
Higher gas prices are expected to push the annual consumer price index to 3.6 percent when August data is released on Wednesday, said Omair Sharif, founder and president of Inflation Insights, an economic consulting firm. However, he said the gas price increase should only be temporary and warned people not to overreact.
“At the moment it does not look like a repeat of the numbers we regularly received after the Russian invasion,” he said. “I wouldn’t freak out. As far as inflation data is concerned, better days are ahead.”
Still, higher gas costs have prompted Republicans to renew their inflation attacks on Biden.
“Americans everywhere are paying the price for President Biden’s failed leadership,” House Speaker Kevin McCarthy, a California Republican, said last month. “Because of Bidenomics, they are spending $709 more per month to pay for the same goods and services they had two years ago.”
The $709 figure came from Zandi’s calculations of the costs of a typical household, although he estimated that about a third of that increase was offset by higher wages. The gap will narrow as inflation falls back to 2 percent by the end of next year and wages continue to rise, but Americans still likely won’t be enthusiastic about the economic situation, he said.
“People are still paying a lot more for bread, milk and gas than they did two or three years ago, so it’s going to take a while for wages to catch up… and for everyone to have a better sense of how things are going,” Zandi said .
Jason Furman, an economist at Harvard’s Kennedy School and chairman of President Barack Obama’s Council of Economic Advisers, believes the last mile in the fight against inflation will be the hardest part. But despite this latest detour, he believes inflation is generally moving in the right direction after a difficult 2022, exacerbated by issues such as higher oil prices following Russia’s invasion of Ukraine.
“Last year inflation was partly because the underlying problem was bad, and then there was bad luck that made it worse,” he said. “I think the underlying problem has improved recently. And the luck has changed to where it’s really good in terms of things like – at least until August – falling gas prices.”
Jim Puzzanghera can be reached at [email protected]. Follow him @JimPuzzanghera.
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