December 9, 2023


Supportive Business Potential

This week in Bidenomics: Fooled by gas prices

This week in Bidenomics: Fooled by gas prices

America’s mood is improving, as gas prices decline. Pump prices have fallen by $1.30 per gallon since June, to a somewhat manageable national average of $3.70. Consumer confidence fell during the first half of the year, as gas prices were soaring, but confidence has improved since July. There’s no better indication that inflation is on the run!

Except, it’s not. Economists and investors thought the latest inflation report, released on Sept. 13, would show a definitive decline in the pace of price hikes, which would allow the Federal Reserve to ease up on interest rate hikes. A mellower Fed would be good for stocks, since lower rates generally mean higher profits.

Whoops. The annual inflation rate only dropped by two-tenths of a percentage point from July to August, to 8.3%. Many economists thought inflation might dip below 8%. The drop in gas prices did bring inflation down, but barely. Other types of inflation remain alarmingly high. Grocery prices are up 14%, year-over-year. Cars, 10%. Rent, 7%. Incomes, meanwhile, are only growing by about 5%. Ordinary people are falling behind.

There will be no respite for the Fed, now widely expected to raise rates by a muscular three-quarters of a point at the meeting that concludes Sept. 21. The Fed will probably keep hiking later this year, as well. Investors got too optimistic, which is why stocks fell hard on the disappointing inflation news.

U.S. Federal Reserve Chair Jerome Powell listens as President Joe Biden nominates him for a second four-year term in the Eisenhower Executive Office Building’s South Court Auditorium at the White House in Washington, U.S., November 22, 2021. REUTERS/Kevin Lamarque

U.S. Federal Reserve Chair Jerome Powell listens as President Joe Biden nominates him for a second four-year term in the Eisenhower Executive Office Building’s South Court Auditorium at the White House in Washington, U.S., November 22, 2021. REUTERS/Kevin Lamarque

Does this hurt President Biden? Maybe not. Gas prices drive consumer psyches, no matter what else is going on, simply because they’re the most visible price signal most consumers see. Gasoline only accounts for 3.3% of the typical family’s spending, compared with 34% for housing, 12% for food and 8% for health care. But gasoline is more volatile, with wide price swings that get people’s attention. When they’re high, it means something’s wrong. When they’re lower, things are better.

Rent only goes up once a year, if that. Most homeowners have fixed-rate mortgages that never change, and the record-low interest rates of the last two years allowed millions to refinance and lock in lower costs. Food is obviously a staple, but shoppers can substitute cheaper brands and economize in other ways, which they are doing.

[Follow Rick Newman on Twitter, sign up for his newsletter or send in your thoughts.]

Gas is different. Drivers can combine trips of convenience, but car commuters can’t drive less if they have to get to work. Buying a newer, more efficient car isn’t really an option, because car prices themselves are elevated. And there aren’t many ways to save money buying off-brand fuel. So it really is good news for consumers when gas prices fall.

It’s good news for politicians, too. Biden’s approval rating has been rising along with broader confidence measures, from a low of 38% in July to 42% in a FiveThirtyEight composite. A recent Associated Press poll shows Biden rising from 36% in July to 45%. In addition to falling gas prices, Biden recently signed a green-energy bill and a China-competition bill. He also moved on student debt, with an executive order forgiving up to $20,000 worth of student loans. Those measures aren’t universally popular, but they do show Biden taking action.

Consumers don’t react very much to the official government inflation number. They know if the cost of milk or hamburgers or pet food or child care is going up or down, but it doesn’t really matter if the overall inflation rate is 8.3% or 7.6%. That’s why gas prices are so important: They’re a proxy for consumer prices that tell people what’s going on, every day.

Economists do think inflation will gradually decline, in part because the Fed will make it happen and in part because COVID-related problems such as supply-chain kinks are finally unwinding. But it’s already taking a lot longer than anybody wants. The urgent political question for Biden and his fellow Democrats is whether falling gas prices alone will provide enough momentum for them to hold both houses of Congress in the November midterm elections.

Probably not. While confidence is recovering, it’s hardly euphoric. Gas prices are still 25% higher than they were a year ago, and there may not be much room for them to fall further. Democrats also face some inherent disadvantages in November, such as the usual midterm loss of seats by the president’s party and a higher incumbent retirement rate than Republicans. Some Democrats think their party has a tailwind that could bring victory, but it will take more than falling gas prices. Don’t let gas prices fool you again.

Click here for politics news related to business and money

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube