As economic woes continue, Biden will struggle to make midterms a referendum on Trump

As James Carville so rightly said in 1992, “It’s the economy, stupid.” It still is.

As President Biden travels the country touting his economic successes and excoriating former President Trump, we prepare for the next debacle courtesy of this president: Biden’s stagflation.

We’ve had Biden’s inflation, Biden’s recession and Biden’s natural gas shortage. Now we have renewed inflation and the very real possibility of a double-dip recession.

Tuesday’s report from the Bureau of Labor Statistics dashed hopes that inflation was cooling. While prices did not budge in July, they rose by 0.1 percent in August, despite a significant swoon in energy costs (gasoline prices declined nearly 11 percent in just one month) and a sharp increase in the value of the dollar. Both of those trends helped stem the rise in prices, but not as much as expected.

Over the past 12 months, the consumer price index (CPI) rose 8.3 percent overall; analysts were expecting 8.1 percent. While the top-line rate of increase has dropped from the four-decade high of 9.1 percent reached in June, the rate of decline is alarmingly slow. Core inflation, absent food and energy, came in at 6.3 percent, up from 5.9 percent in July, and also worse than expected.

Positives other than falling gasoline prices, like some improvement in supply chains, declining commodity prices and lower used car prices also pumped up the “inflation is cooling” story.

The Federal Reserve is now expected to push rates up more rapidly, and for longer, than previously expected. Almost immediately, markets priced in a 20 percent chance of a 100 basis-point hike next week; prior to the latest CPI report, those odds were set at zero.

Whether or not the Fed responds in such an aggressive manner, hopes of a so-called “soft landing” are being recalibrated. Higher rates will take a toll; we have already seen in the housing sector how damaging higher borrowing costs can be. Both new building permits and housing starts have cratered since mortgage rates started to rise.

That, of course, is the expected and desired outcome of rate hikes by the central bank — to weaken demand just enough to stomp out inflation but not torch growth.

Treasury Secretary Janet Yellen recently said it would take “good luck” for the Fed to be able to bring inflation under control without throwing the economy into recession. It looks as though the bank’s luck is running out.

That is especially true since the entire globe is slowing, with much of Europe set to tip into recession. The OECD’s Global Leading Indicators have declined markedly; with central banks in the United Kingdom and European Union raising rates, as in the U.S., a slowdown is underway.

China, too, is experiencing sluggish growth. Hence, we cannot look abroad for help; demand will have to come from the U.S. consumer, who may be running out of energy, and cash.

The good news is that the U.S. labor market remains strong. There are signs of some weakness at the margin, and there have been layoffs in some industries, especially technology and now on Wall Street, where Goldman Sachs has announced plans to fire several hundred employees. But the overall numbers are still robust.

In the fight against inflation, that is good news and bad news. The concern is that in their pursuit of scarce workers, companies are bidding up wages, which then filter into costs and, ultimately, prices. The Atlanta Fed tracks the numbers, and puts the real wage increase recently at 6.7 percent on an annualized basis. That figure alone makes achieving the Fed’s target inflation rate of 2 percent any time soon look extremely difficult.

Even though the wage gains are substantial, they lag inflation. In real terms, the consumer is worse off than before. Consumer confidence recently, after months of decline, ticked higher, in line with expectations that inflation was slowing.

My guess is that renewed concerns about Fed rate hikes, coupled with another leg down in stock and home prices, will undermine confidence and, ultimately, spending.

Thanks to the stock market sell-off earlier in the year, household net worth dropped in the second quarter by a record $6.1 trillion. That is not encouraging.

Meanwhile, even as Biden claims his Inflation Reduction Act will bring down our federal deficit – and inflation – the Committee for a Responsible Federal Budget reports that Biden’s spending plans and executive orders will add an astonishing $4.8 trillion to our deficits over the next 10 years.

The group notes: “In 2020, policymakers appropriately enacted $3.4 trillion of additional borrowing to help fight the pandemic and stabilize the economy. Once the economy was strong enough, Congress and the White House should have stopped engaging in new borrowing and pivoted to focusing on implementing reforms to slow the growth of the national debt.”

That is exactly right. In particular, the $1.9 trillion American Rescue Plan, passed by Democrats alone in March 2021 as the economy was growing at 6 percent, led to an excessive increase in the money supply, and to inflation. The recent canceling of student debt adds yet more fuel to the fire.

Biden touts the questionable deficit-reduction and lower inflation promise of the Inflation Reduction Act, but he has yet to admit that the spending blowout of the past two years is in any way responsible for inflation he has called “transitory” and the fault of Russian President Vladimir Putin.

Biden wants to make the midterms a referendum on Donald Trump, rather than his own policies. With country’s growth slowing, inflation above 8 percent and the average household spending $460 more each month to buy the same basket of goods and services as last year, according to Moody’s, he should.

As James Carville so rightly said in 1992, “It’s the economy, stupid.” It still is.

Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.