The North Star of macroeconomic policy—the ideal point toward which fiscal and monetary measures are intended to take us—is an America where jobs are plentiful and prices rise by 2 percent a year.
And we may have come to just that place.
In May, the US economy added 272,000 jobs, far more than economists had predicted. In the same month, prices were unchanged from April and only 3.3 percent higher than a year earlier, according to a Consumer Price Index (CPI) report released on Wednesday. These figures were both lower than expected.
Moreover, the official CPI data is likely to overestimate the actual pace of price growth in the economy. That’s because a major driver of headline inflation in recent months has been housing costs, and the measure of rental prices by the Consumer Price Index is outdated. The CPI measures what consumers are currently paying in rent, but most renters are paying rates that were set months ago when they first signed their leases. In that time, the continuation rate for new leases has fallen, according to industry data. Thus, the current market price of a rental unit today is lower than the average price currently being paid.
Asking rents fell for the tenth straight month in May, according to a Realtor.com Rent Report released this week. The typical rent has now fallen by $24 since August 2022. In contrast, new CPI data shows rent prices are up 0.4 percent from April and 5.4 percent from a year ago .
As economist Paul Krugman notes, if you remove the outdated rent data from the CPI, the inflation rate looks right in line with the Federal Reserve’s 2 percent target. According to him, this means that “inflation has basically been defeated”.
At first glance, this would seem like good news for Joe Biden. Inflation has long been the president’s biggest political responsibility. If May’s trends continue and Biden leads full employment and stable prices on Election Day, the case for Donald Trump’s candidacy could look drastically weaker.
But there are three reasons for Democrats to fear that the slowdown in inflation will be too little, too late.
First, voters’ distrust of Biden’s economic management appears unwavering. In a recent Gallup poll, only 38 percent of Americans expressed confidence in Biden to “do the right thing about the economy.” That’s up slightly from Biden’s 35 percent in 2023, but it’s still the worst economic approval any modern president has had in Gallup polls, with the exception of George W. Bush right after the financial crisis. In contrast, 46 percent of voters have confidence in Trump’s economic management.
In an average of recent RealClearPolitics polls, Americans disapprove of Biden’s handling of the economy by a 17.6-point margin. And voters’ assessment of Biden’s economic prowess has not improved significantly in recent months, even as inflation has fallen. At the end of Trump’s term, on the other hand, voters approved of his economic management by a margin of 7.8 percent.
Thus, the idea that Biden is personally responsible for rising inflation in 2022—and that he cannot be trusted to effectively manage the economy for that reason—seems deeply ingrained in voters’ minds. The fact that wages have been rising much faster than prices for more than a year has done no harm to this impression. A few more months of falling inflation may move the needle a bit, but there is little reason to assume that such a development will dramatically change public opinion.
Second, relatedly, historical precedent suggests that the economy’s performance so far in Biden’s term will be more important than its performance between now and November. According to Democratic data scientist David Shor, when examining the relationship between GDP growth and the election results of past presidents, their economic data between inauguration and April of their re-election year count far more than economic conditions in the final months of their campaign.
Finally, if inflation has indeed been defeated, the victory has come too late to bring significant interest rate cuts before November. The Federal Reserve declined to cut rates after its meeting this week and forecast a single, quarter-percentage point cut by the end of the year. Investors expect such a cut to come as early as September. Even if the rate cut comes before Election Day, it would leave Americans with dramatically higher borrowing costs than they faced when Biden was inaugurated.
It’s conceivable that a small cut in September could help the president a bit in the margins. Another possibility is for Biden to rescue the nation from an economic crisis and deliver it to a low-inflation, high-employment economy and then immediately hand the White House back to Donald Trump, who will continue to take the lion’s share of credit when the Fed cuts interest rates next year.
After all, whatever else you might say about Trump, he knows how to inherit more than he deserves.