DEMOCRATS CANNOT WISH AWAY THE INFLATION CURSE
The news will likely get even worse for Democrats next year. Slowing economic activity means that unemployment will ultimately go up. Fannie Mae, the federally sponsored mortgage lender, estimated in July that unemployment would rise from its current 3.7%
Tuesday’s inflation numbers showed that prices continue to rise at nearrecord levels despite falling gasoline prices. That means the Federal Reserve will likely continue to jack up interest rates — good for the fight against crushing grocery bills, but bad for Democrats ahead of the midterms.
Don’t let the fact that overall prices rose from July to August by only 0.1% fool you. That slow one-month rise, like July’s 0% rise, was caused almost exclusively by declining prices at the gas pump. Food, shelter and most other items in the consumer price index continued to go up. Food consumed at home, for example, has now increased by 13.5% over the last year, which the Labor Department says is the highest yearly hike since March 1979. So the money Americans save when filling their tanks simply goes out the door to pay for the food on their tables.
That means Federal Reserve Chair Jerome H. Powell won’t take his foot off the monetary brake when the Fed’s Governing Board meets this week. Another 75 basis point interest rate hike is likely, and another one is probably in store for when the Fed next meets right before Election Day. Those hikes would bring the Fed’s target interest rate to nearly 4%, the highest it has been since 2008.
And interest rates could rise even more than that. Historically, the Fed has needed to raise interest rates to a level above the peak inflation rate to have a real impact. August’s data shows that underlying inflation — which measures price changes due to supply-and-demand forces, as opposed to temporary market shocks — is staying steady at about 6%, triple the Fed’s historic 2% benchmark. Absent unexpected declines in that rate, the Fed will almost surely keep hiking interest rates after the election, probably to levels last seen in the previous century.
That’s what needs to happen: Interest rate hikes always depress economic activity by making spending and borrowing more expensive. This, in turn, reduces inflationary pressures, slowing price increases to a manageable level. It’s not pretty or painless, but the Fed’s medicine always brings the inflation fever under control.
The news will likely get even worse for Democrats next year. Slowing economic activity means that unemployment will ultimately go up. Fannie Mae, the federally sponsored mortgage lender, estimated in July that unemployment would rise from its current 3.7% to around 5.5% by the end of 2023.
The stock market will also likely take a big hit if the Fed keeps tightening.
Savvy investors surely know that the index dropped by about 30% in 1981 during the last bout with serious inflation. That also cannot be good for Democrats’ chances this fall.
Rising unemployment in 2023 poses huge political risks for Biden. Decisions by him and the Fed to not take rising prices seriously last year meant the fight did not start in earnest until a few months ago. That might have delayed the political impact of unemployment until after the midterms (although inflation’s persistence will not be good for Democrats), but it also will force Biden to decide whether to run for re-election as job losses pile up and economic news gets worse.
Biden can take some comfort from history. Ronald Reagan took a big political hit in the 1982 midterms as rising unemployment hurt his Republican Party. But he rode rapidly falling inflation and economic growth during the next two years to a landslide re-election victory.
Still, Reagan’s political recovery came when unemployment peaked in January 1983. If unemployment is still rising at the end of 2023, the economy may not improve fast enough for Biden and his party.