The inflation trend is going President Biden’s way. But it will probably take a lot more progress to “finish the job” on inflation, to borrow Biden’s reelection slogan, and for voters to gain enough confidence in Biden to give him a second term.
The good news about inflation is that the annual rate of price hikes has dropped from a high of 9.1% last June to 3%. That’s a big drop in a short period of time. If inflation hit the current pace of 3% without two years of elevated prices, hardly anybody would notice.
But Americans are still wiggy about inflation because they’ve lost purchasing power since Biden became president. Since January 2021, prices have risen 15.6%. Incomes have risen just 12.2%. When prices rise by more than earnings, ordinary people fall behind.
As part of the Yahoo Finance Bidenomics Report Card, we measure real earnings, adjusted for inflation, under Biden compared with seven prior presidents going back to Jimmy Carter in the late 1970s. It’s the weakest of six categories we use to assess the Biden economy. By that measure, real earnings under Biden have dropped 1.1%. Under his predecessor, Donald Trump, real earnings were up 2.5% at the same point in his presidency.
To invigorate voters, Biden needs to flip this equation and be able to say real incomes have risen on his watch. It could happen. By our measure, which is based on data provided by Moody’s Analytics, real earnings under Biden bottomed out in June 2022, when inflation was at its cyclical peak. Though still negative, real earnings have improved since then. A continuation of that trend could turn earnings growth from negative to positive at some point in 2024.
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Consumers do seem to have noticed that inflation has come way down. The University of Michigan’s consumer sentiment index jumped in mid-July, to the highest level in 22 months. That’s likely due to three factors: improving inflation, a continued strong labor market, and a recent rally in stocks.
That hasn’t yet benefited Biden. His approval rating is a lowly 41%, and it has barely improved during the last year, even as inflation has come down. Consumers are feeling better, but they’re not giving Biden credit for whatever they think is going right.
There’s room for improvement, however. Rents have been rising by more than 8% on an annualized basis, far more than overall inflation. That’s a budget-killer since housing is the biggest expense for most families. But rents should be moderating. Zillow points out that a surge in multi-family construction will bring more rental housing online and that rents normally flatten and sometimes decline during the second half of the year, anyway. Since many renters sign a lease annually, more people will be able to cash in on improving rents.
Goods inflation, which surged during the COVID pandemic as people stayed home and bought more stuff, peaked at 14% year over year. But goods inflation has now turned negative, which means overall prices are falling. That seems likely to continue. The semiconductor shortage that made new cars scarce has basically ended, and consumers are drawing down “excess savings” they accumulated while stuck at home. If they spend less, that will bring prices down.
Services inflation, which includes housing, peaked at 7.6% this past January. It’s now at 5.7%. That’s where the problem remains. When Biden talks about “finishing the job,” he means winning a second term to continue what he began in his first. But he may have to get rents down to finish the job on inflation within the next year, in order to get those additional four.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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