This week on Bidenomics: post-midterm relief

President Biden is hoping for a break on inflation before the midterm elections on Nov. 8. Instead, it arrived two days later. Better late than never.

The annual pace of inflation slowed from 8.2% in September to 7.7% in October. It’s still too high, and essential needs like food and transportation are rising even more. But economists now see clear signs that inflation has peaked and will probably continue to decline to a normal level.

“Disinflation begins in earnest,” said Capital Economics in an analysis on Nov. 11. “The October report shows the widespread disinflationary pressure evidenced in the measures of the private sector-other sectors are finally feeding through”. Disinflation is a decrease in the rate of inflation, while overall inflation remains positive. Deflation is a fall in prices, or negative inflation, which generally hasn’t happened yet, but could.

For Biden, high inflation is a political problem, because it turns voters on the incumbent’s leadership—him—and provides powerful ammunition for Republican critics. But Democrats’ overwhelming performance in the midterms suggests inflation and a slowing economy haven’t hurt Biden as much as everyone thought.

LAS VEGAS, NEVADA - NOVEMBER 08: Supporters cheer as US Senator Jacky Rosen (D-NV) speaks at an election night party hosted by Nevada Democratic Victory at The Encore on November 08, 2022 in Las Vegas, Nevada.  Supporters and candidates are gathering to await results for several key races in the state of Nevada including the gubernatorial and Senate races.  (Photo by Anna Moneymaker/Getty Images)

Supporters cheer as US Senator Jacky Rosen (D-NV) speaks at an election night party hosted by Nevada Democratic Victory at The Encore on November 08, 2022 in Las Vegas, Nevada. (Photo by Anna Moneymaker/Getty Images)

Once all the votes are counted, Democrats will likely lose control of the House, but by a smaller margin than almost all election forecasts. Exit polls show that abortion and election security issues are bigger factors among voters than previous polls have suggested, with the economy slightly less of a concern. Maybe voters have a sense that inflation has receded, or they’re finding joy in the drop in gas prices since they hit $5 a gallon in June.

Improving the inflation outlook is also a big relief for investors, of course, mostly because of the effect of how high the Federal Reserve will push interest rates. There have been several false rallies in the stock market since the summer, when traders speculated that the upcoming inflation data would show notable improvements that would allow the Fed to withdraw. People fizzled when inflation data came in hot instead. But the market now seems to think that we have turned the corner for good, with the S&P 500 and NASDAQ indexes reading higher in October inflation data.

Prices are falling on the horizon

We may soon see direct price declines—deflation—in several categories. Most people understand inflation on a year-over-year basis, and The 12-month change in prices of most things is still positive, even though the inflation rate has moderated. On a month-to-month basis, however, some things get cheaper, which will eventually appear as year-over-year price declines, and help bring the overall inflation rate lower still.

[Follow Rick Newman on Twitter, sign up for his newsletter or sound off.]

The price level for used cars fell 2.4% from September to October, which is the second biggest drop since 2003. The price of used cars spiked earlier this year, as the lack of microchips for new cars caused an acute production shortfall, forcing many new car buyers to the used market. The lack of chips makes it easier, which means that the price of the car will be normal. As Moody’s Analytics points out, a drop in the price of a regular car usually foreshadows a drop in the price of a new car a few months down the road.

The average house price, measured by the S&P / Case-Shiller index, has fallen for two consecutive months, for a total decrease of 1.5% from June to August, the latest data available. House-price deflation may have much further to run. Prices have just started to fall as mortgage rates rise, triggered by the Fed, pricing out buyers and depressing demand. The huge price increase from April 2020 to June 2022 is definitely a bubble fueled by record levels of legal and property purchases caused by COVID, so a price correction makes sense. It takes time, however, for the decline in house prices to flow through rent and other housing-related costs.

The end of the midterms brings a sense of relief, as heated political rhetoric dies down and campaign-related stunts subside. The next few months could still be a slog. Grocery prices remain abnormally high, with annual food inflation running at 12.4%. Energy prices are high and could be even higher this winter as Russia and the West continue to wage an energy war in parallel with the military war in Ukraine. Many economists think a recession will hit in 2023, although it is likely to be mild.

Biden can relax, with less need during the coming months to convince voters that he is reducing inflation and leading an otherwise solid economy. The following year, in fact, could help Biden and the Democrats, if inflation recedes and a mild recession helps balance the chaotic supply chain and other parts of the economy still distorted by the COVID pandemic.

By the time we get to the 2024 election, Democrats may have a good economic story to tell. But let’s relax for a moment before we talk about the next political race.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

Click here for political news related to business and money

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for apples or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedInand YouTube

Leave a Reply

Your email address will not be published. Required fields are marked *