America’s sentiment improves as gas prices fall. Gas pump prices have fallen $1.30 a gallon since June to a somewhat manageable national average of $3.70. Consumer confidence fell in the first half of the year as gas prices soared, but confidence has improved since July. There is no better indication that inflation is on the run!
Except it’s not. Economists and investors thought the latest inflation report, released on September 13, would show a definitive slowdown in the pace of inflation, allowing the Federal Reserve to ease interest rate hikes. A softer Fed would be good for stocks, as lower interest rates generally mean higher earnings.
Oops. The annual inflation rate fell from July to August by only two tenths of a percentage point to 8.3%. Many economists thought inflation could fall below 8%. Falling gas prices have reduced inflation, but little. Other types of inflation remain alarmingly high. Food prices are up 14% year-on-year. cars, 10%. Rent, 7%. Meanwhile, incomes are only growing by about 5%. Ordinary people fall behind.
There will be no respite for the Fed, which is now widely expected to hike rates by a hefty three-quarters point at the September 21st meeting. The Fed is likely to continue to rise later this year as well. Investors became overly optimistic, causing stocks to fall sharply on disappointing inflation news.
Does this hurt President Biden? Maybe not. Gasoline prices drive consumer psyches no matter what else happens, simply because they are the most visible price signal most consumers see. Gasoline accounts for just 3.3% of a typical family’s spending, compared to 34% for housing, 12% for groceries and 8% for health care. But gasoline is more volatile, with large swings in price catching people’s attention. If they are high, it means something is wrong. When they are lower, things are better.
Rent increases only once a year, if at all. Most homeowners have fixed-rate mortgages that never change, and record-low interest rates over the past two years have allowed millions to refinance and secure lower expenses. Groceries are obviously a staple, but shoppers can substitute cheaper brands and save in other ways, which they do.
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Natural gas is different. Drivers can combine convenience trips, but car commuters can’t drive less when they have to get to work. Buying a newer, more efficient car isn’t really an option as car prices themselves are high. And there aren’t many ways to save money when buying other brands of fuel. So it’s really good news for consumers when gas prices fall.
This is also good news for politicians. Biden’s approval rating has risen to 42% in a FiveThirtyEight composite from a low of 38% in July, along with broader measures of confidence. A recent Associated Press poll shows Biden rising to 45% from 36% in July. In addition to falling gas prices, Biden recently signed a green electricity law and a China competition law. He also addressed student debt, with an executive order forgiving up to $20,000 worth of student loans. These actions aren’t universally popular, but they show that Biden is taking action.
Consumers are not very responsive to the government’s official inflation figures. You know whether the cost of milk or hamburgers or pet food or childcare goes up or down, but it doesn’t matter if the headline inflation rate is 8.3% or 7.6%. That’s why gas prices are so important: they’re a proxy for consumer prices, telling people what’s going on, every day.
Economists believe inflation will gradually ease, in part because the Fed will see to it and in part because COVID-related issues like supply chain kinks are finally being resolved. But it’s been taking a lot longer than everyone wants. The pressing policy question for Biden and his Democrats is whether falling gas prices alone will give them enough momentum to hold both houses of Congress in November’s midterm elections.
Probably not. While confidence is recovering, it’s hardly euphoric. Gas prices are still 25% higher than a year ago and there may not be much room for a further decline. Democrats also face some inherent disadvantages in November, such as the president’s party’s usual medium-term loss of seats and a higher pension ratio from incumbents than Republicans. Some Democrats believe their party has tailwinds that could bring victory, but it takes more than falling gas prices. Don’t let the gas prices fool you again.
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