By Louis Gilmore
CPI inflation rose 3.5% over the 12 months to March in the US — up 0.4% from the previous month. Inflation has largely been driven by rising housing, clothing, and motor fuel prices.
Oil will likely be volatile in the coming months due to growing tensions in the Middle East.
Interest rates, which are at their highest level in 20 years, will be kept high. Markets had predicted that the Fed would begin lowering borrowing costs, yet bets have been revised. Many are not expecting cuts until later this year — or, in some conservative predictions, until after the election.
The news that CPI remains stubborn is psychologically damaging. People often hate high inflation far more than other measures, like high unemployment. Inflation is a daily source of anxiety — people notice when the same $100 buys fewer groceries or gallons of petrol. The impacts, however, are disproportionately felt by the working class. Despite inflation having fallen significantly since its peak in 2022, 52% of small business owners cite inflation as their biggest concern.
For markets, interest rates being kept high raises doubts about the sustainability of government debt. In 2023, spending surpassed revenue by 8.8% of GDP. In 2022, this figure stood at only 4.7% of GDP. High levels of government debt coupled with persistently high yields crowd out other government spending, limit policy flexibility for the next downturn, and cause growth to suffer. The IMF has warned that higher government debt poses significant risks to the global economy.
The US economy, otherwise, has been performing relatively well — the Democrats attributing this strong performance to Bidenomics. Since Biden’s inauguration, 15.2 million jobs have been created, unemployment remains far below 4%, and stock markets are performing well. Crucially, wages remain high and are rising faster than inflation — a trend that has been the case for nearly a year.
Yet alarm bells over inflation and debt are ringing. Americans were expecting rate cuts, an undeniable psychological boost, an indication that, perhaps, the war against inflation is over. Yet cuts are increasingly unlikely before the election.
Unfortunately for Biden, the discontent with the economy is reflected in polling forecasts. Voters are unhappy with Biden’s economic record. A recent study by the Financial Times found that 42% of Americans felt Trump was the better option for the US economy, compared to 31% for Biden.
The result of the election is in the balance. 70% of Americans believe that inflation has worsened their future economic well-being and view the health of the economy through everyday prices, and those who have most felt the impacts of inflation have cast critical swing votes in the last two presidential elections. Biden won the 2020 election, in part, by gaining votes from working-class white voters in swing states like Michigan and Wisconsin. Unfortunately for the Democrats, non-college graduates and the working class now overwhelmingly support Trump on the economy.
Many working-class Americans reject the Democrats’ tendency to expand social programs and place other issues in the rear-view mirror. Families often think social programs are unnecessary but love the idea of not having to worry about affording groceries or other bills. Perhaps this is partly due to the intense hyper-partisanship in American politics. Weeks into Biden’s presidency, Republicans were already casting blame on Biden for rising fuel prices. Likewise, fears over debt sustainability are a uniquely Republican fear, founded upon viewing government debt as akin to household debt.
“Inflation is bad for politics, particularly the incumbent.”
Republicans are keen to use this news to tarnish Biden’s image and, unsurprisingly, the war on this front has already begun. Reacting to CPI remaining higher than expected, former President Donald Trump took to Truth Social to write “INFLATION is BACK — and RAGING!”.
Inflation is bad for politics, particularly the incumbent. Biden must be seen as strong and aware of the unique challenges faced by the working class — something he successfully showed in the 2020 election.
Image: Picryl / Executive Office of the President of the United States