Steady Inflation and Economic Growth Ease Pressure on Biden as Re-election Nears
In a welcome turn of events for President Joe Biden, the Federal Reserve’s preferred inflation gauge has continued to cool, providing some relief as he seeks re-election in a race that could hinge on his economic stewardship. The latest data indicates a trend towards price stability and steady economic growth, boosting confidence among consumers and easing concerns about a recession.
Inflation Moderates to Fed’s Target
According to a government report, prices rose by only 0.2% from November to December, aligning with pre-pandemic levels and barely exceeding the Fed’s 2% annual target. Year-over-year inflation stood at 2.6%, with core prices, excluding volatile food and energy costs, rising by 0.2% month-on-month and 2.9% annually, marking the lowest increase since March 2021.
Soft Landing in Sight
The data suggests that the economy is achieving a sought-after “soft landing,” wherein inflation falls to the Fed’s target without triggering a recession. This outcome could pave the way for the Fed to consider cutting its key interest rate, which it has raised 11 times since March 2022 to combat inflation. Higher interest rates have impacted home sales and business borrowing costs.
Solid Economic Growth
Despite inflation concerns, the economy grew at a robust 3.3% annual pace in the final quarter of 2023, driven by strong consumer spending. This growth defied early recession fears and capped a year of healthy expansion.
Political Battleground
Biden’s Republican critics have seized upon the recent inflation surge, blaming it largely on the president’s spending policies. However, as inflation cools and consumer sentiment improves, Americans are showing signs of growing optimism about the economy. Consumer confidence has jumped significantly in recent months, indicating a shift in public perception.
Inflation in Check
The latest data paints a picture of inflation being effectively controlled. Over the past six months, prices have increased by just 1.9%, below the Fed’s 2% target. The three-month inflation rate is even lower at 1.5%.
Food Prices Stabilize
Grocery prices, after a period of sharp increases, remained unchanged in December and were only 1.3% higher than a year earlier. Chicken prices even saw a slight dip, while beef and veal prices climbed modestly.
Fed Policy Outlook
The Fed is expected to keep interest rates unchanged at its upcoming policy meeting. However, attention will be focused on Chair Jerome Powell’s news conference for hints about when rate cuts might begin. Economists believe that inflation is on track, positioning the Fed to start cutting rates in the coming months.
Supply Chain Recovery and Labor Market Dynamics
The decline in inflation has been attributed to recovering global supply chains and an increase in labor force participation, which has helped moderate wage growth. Slower wage increases reduce pressure on businesses to raise prices to offset higher labor costs.
Consumer Pushback and Price Adjustments
Consumers are now showing resistance to price hikes, leading some companies to forgo or minimize price increases. The Fed’s beige book report indicates that many businesses are experiencing reduced pricing power.
Automotive Market Dynamics
The automotive sector exemplifies this trend. Car dealers now have more vehicles on their lots, giving consumers more options and bargaining power. This shift has resulted in reduced profit margins for dealers, who are offering enhanced discounts to attract buyers.
Fed’s Cautious Approach to Rate Cuts
While the Fed has projected three quarter-point rate cuts this year, it has provided limited clarity on the timing of the first cut. Several Fed officials have emphasized the need for a cautious and measured approach, suggesting that a March cut may not be likely.
Conclusion
The cooling inflation and steady economic growth provide a favorable backdrop for President Biden as he seeks re-election. The Fed’s focus on maintaining price stability while supporting economic growth will be crucial in shaping the economic landscape in the coming months.