The consumer price index report for September, the final update before voters head to the polls, could help determine the balance of Congress.
The Bureau of Labor Statistics will release the CPI report for September on Thursday morning. The consensus forecast is that headline inflation slowed two-tenths of a percentage point to 8.1% in September. Economists also expect, though, that “core inflation” (that is, inflation with the volatile categories of food and energy stripped out) accelerated two-tenths of a percentage point to 6.5%.
A deceleration in inflation would help President Joe Biden and Democrats, whose approval ratings have suffered as rising prices have hurt households.
But if the numbers come in higher than expected, Democrats will be denied a helpful talking point. Furthermore, stock markets will likely take a hit.
August’s inflation report featured prices clocking in higher than forecasters had expected, sending the markets into a spiral as fears grew that the Federal Reserve would have to keep aggressively hiking interest rates in order to drive down inflation.
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While consumers care more about what they are tangibly paying for goods and services — and the expected change in the coming CPI is slight — perceptions that inflation is hotter than expected will undoubtedly benefit Republicans.
Republicans have used the higher prices as a cudgel against Biden and Democrats more generally.
They contend that the raft of fiscal spending passed early in Biden’s term pushed out too much money into the economy and the inflation consumers are now experiencing is the fault of Democratic lawmakers in Congress.
And using inflation against Democrats could turn out to be a winning strategy. Polling indicates that the country’s explosive inflation is the most pressing issue that voters want to see addressed in the lead-up to the November elections.
Some 82% of those queried in a recent Monmouth survey ranked inflation as an extremely or very important issue, while 56% cited abortion as a top concern and 32% cited the COVID-19 pandemic.
Additionally, a Gallup poll conducted last month also found that when respondents were asked what party they think would do a better job handling the problem they think is most important, people chose Republicans by a wide 48% to 27% margin. That is a flip from a year ago, when more people trusted the Democrats.
Those numbers bode well for Republicans seeking to use a higher-than-expected inflation reading on Thursday to criticize their Democratic rivals.
And the stakes are quite high.
The Senate is evenly divided right now, with Vice President Kamala Harris serving as the tiebreaking vote and giving Democrats a slight edge. Republicans hope they can wrest control of the Senate, although most political analysts contend that Democrats have an advantage. A bad inflation reading could be the spark that the GOP needs to push the party to victory and regain the Senate.
Democrats also hold a slight majority in the House. Political experts have given Republicans an advantage in taking control of the House, and another gloomy CPI reading could cinch victory, delivering the party a key bastion to push back on the Biden administration’s agenda.
More substantively, a report showing that inflation is stubbornly high would suggest to investors that the Fed will have to hit the economy even harder in order to crush higher prices — at the risk of an outright recession.
JPMorgan Chase CEO Jamie Dimon said this week that a recession is now at the country’s doorstep.
“These are very, very serious things which I think are likely to push the U.S. and the world — I mean, Europe is already in recession — and they’re likely to put the U.S. in some kind of recession six to nine months from now,” Dimon told CNBC on Monday.
The Fed has had to raise rates very quickly in an effort to combat inflation. Its interest rate target has risen by 2.25% in the past four months, the most forceful rate hikes since the Great Inflation of the late 1970s and early 1980s. The target is now 3% to 3.25%, the highest it has been since the financial crisis in 2008.
“In a world of instability and surprises, it’s hard to know exactly how much higher interest rates will have to be, causing what Chairman Powell has warned will include pain along the way. It’s already led to a bear market in stocks and a deep freeze for the housing market,” said Mark Hamrick, a senior economic analyst at Bankrate.
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Conversely, a much better-than-expected reading could be used by the Democrats to reassure voters that the economy is holding up and will be able to weather the inflationary storm.
