President Joe Biden said it himself this week: “Prices are still too high.” Unfortunately for Biden, Tuesday’s inflation report came in hotter than expected, ensuring that one of his toughest political problems isn’t going away.
The Labor Department said the Consumer Price Index in January was up by 3.1 percent from a year earlier. That was a decline from 3.4 percent in December but higher than the 2.9 percent that economists projected in a Bloomberg survey. Housing costs were a notable contributor to January’s increase.
The report could put pressure on the Federal Reserve to keep interest rates higher for longer as it fights to tamp down inflation, drawing out a potential drag on consumers and businesses. It also comes as the fight over high prices enters a new phase through the lens of the 2024 campaign.
The strength of the U.S. economy under Biden’s watch is indisputable, with more and more economists scaling back their forecasts for a recession this year. In response, Republicans are focusing their economic critiques on the persistence of higher prices, even if cost increases have been decelerating. Inflation has risen faster than average weekly earnings since Biden was sworn in.
“Prices are not going up as quickly, but wages still haven’t caught up to the inflation we’ve seen over the last couple of years,” Heritage Foundation public finance economist EJ Antoni said before the CPI announcement. “That’s a big reason why people are so down on this economy and will continue to be so until that changes.”
The biggest impact of the latest inflation report is that the Fed may take longer to kick off rate cuts. The central bank plans to lower rates this year, but it has been in a tug of war with Wall Street over expectations for timing.
Fed Chair Jerome Powell in recent weeks has signaled a March rate cut is off the table, and Tuesday’s inflation news means the anticipation of a May move may shift to June or even later. U.S. stocks fell after the report.
The CPI report will likely provide more fodder for Republicans who argue that Democrats are out of touch when it comes to the pain of elevated prices. The White House is trying to emphasize that Biden is on the case. Treasury Secretary Janet Yellen will make swing state appearances in Pennsylvania and Michigan this week.
The president released a video on Super Bowl Sunday bashing companies for “shrinkflation” and not cutting prices. Biden revisited the attack in a speech on Monday where he warned against “greedflation.”
“I’m calling on corporations to pass their savings on to consumers, for God sake,” he said.
Broad-based deflation — a reversal of prices — probably isn’t happening in the run-up to election day, barring some economic cataclysm. Disinflation is expected to continue but may not be rapid.
A majority of economists surveyed by the National Association for Business Economics expect that CPI will remain elevated, with about two-thirds believing it’s likely or very likely to stay above 2.5 percent through the end of the year. A New York Fed consumer survey released Monday showed inflation expectations mostly stable, with the median for this year at about 3 percent. The White House flagged another New York Fed finding that showed perceptions about household finances improved last month, with more respondents saying they were better off than a year ago and fewer saying they were worse off.
RSM US principal and chief economist Joseph Brusuelas argues that gasoline prices will be key to any shift in how consumers perceive the inflation situation.
“When you talk to your median consumer and you ask about inflation, what they’re really talking about is gasoline and groceries,” he said before Tuesday’s CPI release. “If we continue to see moderation in energy and gasoline costs, that’s a net positive for the incumbent.”
The “$64,000 question,” according to Unlimited Funds co-founder and CEO Bob Elliott, is whether inflation picks up again.
“The disinflationary pressures that have been in place for bringing CPI down may not persist forever,” he said Monday. “Where inflation will settle is going to be more a function of those more structural inflationary dynamics, like housing costs and overall services price inflation, which is connected to wages. Those things have not come down anywhere near as much as goods prices have come down.”