President Joe Biden keeps trying to talk America out of worrying about inflation, but it’s not working.
One of the reasons Biden has been so ineffectual is that he has repeatedly made statements that conflict with the reality Americans face in their daily lives. For example, in an interview with 60 Minutes that aired over the weekend, the president claimed that inflation in August rose “just an inch, hardly at all.”
Presumably, he had in mind the fact that the consumer price index rose only a tenth of a percentage point from July to August. Unfortunately, once you took out gasoline, inflation rose by much more than that. Core inflation, which excludes food and fuel, rose 0.6%. Food prices increased by 0.7%. Median inflation, which many economists consider a good indicator of underlying inflationary pressures, rose 0.7%. This annualizes to over 9% inflation, the highest we have ever seen in records dating back to 1983.
In other words, prices rose a lot in August. When Biden tells America that prices are rising at an annualized rate of 9.2%, that’s “just an inch, barely,” he might as well be telling people not to believe their lying eyes.
The latest poll from the Economist and YouGov says people prefer eyewitness testimony to the president’s words. Seventy-five percent of people say inflation is a “very important” issue. Forty-three percent say they expect inflation to be higher six months from now than it is today. Another 26% say they expect inflation to remain unchanged in six months. Only 18% say they expect it to be lower.
The partisan split is even more remarkable. Sixty-three percent of Republicans expect higher inflation and 22% expect inflation to remain at current levels. Only 7% of Republicans expect inflation to drop. Forty-seven percent of independents expect inflation to rise and 23% to stay where it is. Only 13% expect inflation to fall. Even among Democrats, a majority expects inflation to rise or stay high, with 21% predicting higher inflation and 33% predicting stable inflation. Only 32% of Democrats expect inflation to drop.
Biden tells people we’re going to get inflation under control, but even his own party is skeptical.
“I say to the American people that we are going to get inflation under control,” President Joe Biden told Scott Pelley. Mr Biden says his plan to avoid a recession is to “keep growing the economy”. https://t.co/7SixTE3OMT pic.twitter.com/iwUl3NW4kE
— 60 Minutes (@60Minutes) September 19, 2022
This is also bad news for the Federal Reserve. Poll figures indicate nearly three-quarters of Americans don’t believe the central bank’s tightening campaign will bring inflation down over the next six months. This raises the danger of an inflationary mentality taking hold. When consumers expect higher prices, they postpone their purchases to avoid higher prices in the future. Increased demand can push prices up even faster. Similarly, workers who expect inflation will demand more compensation, and this extra income adds to demand and therefore to inflation.
When Jerome Powell says “time is running out” to get inflation under control, it is this shift towards inflationary psychology and behavior that worries him. He would be wise to use his time in the public spotlight this week at the press conference after the Federal Open Market Committee to once again try to persuade the public that he will stop at nothing to drive down the rate of interest. ‘inflation. An extremely hawkish press conference, however, will likely send the stock market plummeting. Powell knows this all too well, and it might cause him to pull his punches a bit.
The market expects a 75 basis point hike at the next meeting. Fed funds futures imply a little less than a one-in-five chance of a 100 basis point rise. However, the real focus for investors will likely be what the Fed says or doesn’t say about the pace of the upcoming hikes. Larry Kudlow last week called for at least three 100 basis point hikes this year, which would put the federal funds rate at 5.25%. It’s unlikely to happen, but it would likely get the public to pay attention and believe Powell when he says he will bring inflation down.