President Biden was hoping for a pause on inflation ahead of the Nov. 8 midterm elections. Instead, it happened two days later. Better late than never.
The annual rate of inflation slowed from 8.2% in September to 7.7% in October. This is still too high, and basic necessities such as food and transportation are increasing further. But economists are now seeing clear signs that inflation has peaked and will likely continue to decline to normal levels.
“Disinflation is starting in earnest,” Capital Economics said in a Nov. 11 analysis. “The October report showed that the broad-based disinflationary pressure evident in other private sector measures has finally materialized.” Disinflation is a drop in the rate of inflation, while headline inflation remains positive. Deflation is falling prices, or negative inflation, that usually hasn’t happened yet, but could.
For Biden, high inflation has been a political problem, as it embitters voters on the incumbent leadership — him — and gives Republican critics potent ammunition to fight their way through. Still, the Democrats’ mid-term outperformance suggests that inflation and a slowing economy haven’t hurt Biden as much as everyone had anticipated.
Once all the votes are counted, Democrats will likely lose control of the House, but by a much smaller margin than nearly all election forecasts predict. Exit polls show abortion and election security concerns were a bigger factor among voters than previous polls suggested, with the economy being slightly less of a concern. Maybe voters sensed inflation was already receding, or they took comfort in the sharp drop in gas prices since hitting $5 a gallon in June.
The improving outlook for inflation is also a huge relief for investors, of course, mainly because it influences the level to which the Federal Reserve will push interest rates. There have been several false rallies in the stock market since the summer, when traders guessed that the upcoming inflation data would show notable improvements that would allow the Fed to pull back. These slumped when inflation data came in hot instead. But the markets now seem to think we have definitely turned the corner, with the S&P 500 and NASDAQ indexes climbing higher on October inflation data.
Lower prices on the horizon
We may soon see outright price declines – deflation – in some categories. Most people understand year-over-year inflation, and the The 12-month change in the price of most things is still positive, even though the inflation rate has moderated. From month to month, however, some things become cheaper, which will eventually translate into lower prices year over year and help bring the overall inflation rate down further.
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The price level for used cars fell 2.4% from September to October, the second biggest drop since 2003. Used car prices soared earlier this year as a shortage of microchips for new cars has caused an acute production shortfall, forcing many new-car buyers into the used market. The shortage of chips is decreasing, which means that car prices will normalize. As Moody’s Analytics points out, a drop in used car prices generally predicts a drop in new car prices a few months later.
The average price of a house, as measured by the S&P/Case-Shiller index, has fallen for two consecutive months, for a total decline of 1.5% from June to August, according to the latest available data. House price deflation probably still has a long way to go. Prices are just starting to fall as soaring mortgage rates, triggered by the Fed, depress prices for buyers and depress demand. The huge price run from April 2020 to June 2022 was undoubtedly a bubble fueled by record rates and COVID-induced home purchases, so a price correction makes sense. However, it will take time for a decline in house prices to affect rents and other housing costs.
The end of midterms brings a sense of relief, as heated political rhetoric dies down and campaign-related stunts wane. However, the next few months could still be difficult. Food prices remain abnormally high, with annual food inflation of 12.4%. Energy prices are high and could skyrocket over the winter as Russia and the West continue to wage an energy war alongside the military war in Ukraine. Many economists believe a recession will hit in 2023, although it is likely to be mild.
Biden can take a breather, with less need over the next few months to persuade voters that he is bringing down inflation and presiding over an otherwise strong economy. The next year, in fact, could be helpful for Biden and the Democrats, if inflation recedes and a mild recession helps restore balance to messy supply chains and other parts of the economy. further skewed by the COVID pandemic.
By the time we get to the 2024 election, Democrats might have a pretty good economic story to tell. But let’s relax for a moment before we start talking about the upcoming political races.
Rick Newman is a senior columnist for Yahoo finance. Follow him on Twitter at @rickjnewman
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