Battling ideas of inflation
No one predicted that the United States economy would soar by 3.1pc in 2023. The buoyancy has taken everybody by surprise not least the US central bank, the Federal Reserve, which aimed to suppress exuberance in the battle against inflation.
This ought to be terrific for Joe Biden and the Democrats in a general election year when the White House, House of Representatives, one-third of the Senate and 11 state governorships are up for grabs.
In spite of the apparently favourable economic climate – remember Bill Clinton and ‘it’s the economy stupid’ – Biden is, at this early stage of an election year, struggling to win over voters in what US economists are now calling a ‘vibecession’. That is when public opinion about economic trends lags way behind the data. So for the moment, Donald Trump is still able to occupy the economic high ground.
What is going on across the Atlantic must trouble Rishi Sunak who has a view from his £5m Santa Monica apartment. If the polls are to be believed, the next British election was lost long ago when the Tories ditched Boris Johnson, firstly for Liz Truss and then Sunak. The Conservatives’ best hope of hanging onto power is a recovering economy and creating a feel-good factor by aggressive cuts in personal taxes.
There are some early signs that consumer confidence is returning in Britain but whether the bounce is sufficient to overcome the dissonance created by the ‘cost of living crisis’ is problematic.
Evidence from America is that getting cutthrough, after some 18 months of rampaging inflation, is the biggest challenge facing the White House as it looks towards November. There is no reason to think that opinion is going to more easily shift than in Britain.
The US, similarly to Britain, has experienced one of the swiftest and biggest collapses in consumer prices in recent history, falling from a peak of 9.3pc in late 2022 to 3.4pc in December 2023.
Those of us sceptical about claims from the Fed and the Bank of England that the great inflation was transitory are being proved wrong. Yet American polling shows that for the public, cost of living concerns rank above almost all else.
So why is there a mismatch between perceptions and reality on inflation?
Two explanations come to mind. The first is that many citizens receive economic news via the broadcast media. When the consumer prices index temporarily moved up to 4pc from 3.9pc in December the blip was treated by the BBC’s Today programme as a national tragedy.
SIMILARLY, expert voices on everything from the squeeze on hairdressing salons to rising social dissatisfaction routinely refer to cost of living pressures or crisis even though real wages (and benefits), adjusted for inflation, are rising.
The second factor is perception. The costs that people come up against most frequently are snacks such as Mars bars, a cup of coffee or the weekly shopping basket.
Yet for the average household in the UK, food bills represent just 11pc of after-tax income and 14.8pc for the very poorest. What makes food bills special is the frequency of the encounter not the impact on lifestyles.
Big purchases such as a 55-inch flat-screen television bought for £1,200 are infrequent. A purchased or rented new sports utility vehicle (SUV) is a once in a four or five year transaction, or even longer.
If the price has moved up, you are unlikely to notice. Whereas one is very conscious of fuel costs and the annoying habit of them rocketing when wholesale prices go up and softly landing like a feather when they fall.
Even if the headline rate of inflation falls dramatically, it takes a long time for the change to be recognised.
It is terrific, for instance, that borrowing costs are coming down and fixes for home loans over five years can be done at under 4pc. That might come as some relief, but it will be difficult for those with mortgages to forget the halcyon days when interest rates were kept low.
The bigger challenge for the Tories is convincing voters that the inflation genie is back in the jar.
Tax cuts will help. Potentially, price matching or cutting by Tesco, Sainsbury’s and the other grocers could inadvertently be Rishi Sunak’s biggest ally.