High inflation moderated a wee little bit in April, satisfying nobody. President Biden now says fighting inflation is his top priority, but markets don’t seem to believe him. Stocks are manic, gas prices are at new record highs, homes are getting more expensive and something weird is happening in crypto that may or may not spill into the broader economy.
Inflation in April was 8.3%, down from 8.5% in March. Okay sure, it went down, not up, great, but economists thought it would drop by more, given improvements in clogged supply chains and other hopeful signs. Stubbornly high inflation means the Federal Reserve has no choice but to keep hiking interest rates, to cool spending. The higher rates go, the more likely the Fed screws up and tips the economy into recession.
Stocks hate that. The S&P 500 index (^GSPC) has dropped 13% since late March and 16% since its early January peak, nearing a bear market. The NASDAQ index (^IXIC) and its high-flying tech stocks are already in a bear market, down 26% from the November peak. There’s still the occasional rally, such as the 2% gain in the S&P on May 13. But selloffs have swamped rallies all year, as the Fed deactivates the turbocharger and slams on the brakes and the market reprices shares downward. The stock selloff could get worse.
Thirty-year mortgage rates have surged from 3% to 5.3% in less than six months, and could hit 6% before long. Rates still aren’t high by historical standards, but they rarely rise this much this quickly. Homebuyer heads are spinning. Higher borrowing costs could cool the hot housing market eventually, but there aren’t enough houses to start with, so for the time being, affordability will just get worse.
Are you tired of hearing about high gas prices? Too bad, because they keep going higher. The average price for regular is now $4.43 per gallon, the highest nominal price ever. Diesel prices have risen by even more than gasoline, and now average $5.56 per gallon. Trucking costs are surging, and there’s a shortage of diesel on the East Coast that could lead to rationing and delivery disruptions for all kinds of goods. This is not a thing that’s supposed to happen.
How’s your crypto portfolio doing? If you have one, bad. A stablecoin most people have never heard of, called Terra (LUNA1-USD), has basically collapsed, triggering a selloff in bitcoin and most other cryptocurrencies. Bitcoin (BTC-USD) is down even more than stocks, to around $30,000, a 55% tumble from its high last November. There’s schadenfreude among traditionalists who think crypto is a sham and cryptonauts deserve to lose all their money, but it would be better if billions of dollars of crypto wealth evaporated when other things were going right.
If you ran the Republican National Committee and you could scheme up one more way to sabotage the Biden presidency, what would it be? Baby formula? Brilliant! We now get to find out if it works, because there’s a nationwide shortage of baby formula. A big Abbott factory linked to contaminated formula shut down in February and still hasn’t reopened, leaving shelves bare in many stores. It’s not clear why nobody has solved the problem, but there’s now a new entry on the list of presidential don’ts: DON’T STARVE BABIES.
Consumer confidence is lower than at the outbreak of COVID and back to levels of 2011, when the scars of the Great Recession were still raw. The economy is not that bad. The job market is still hot, unemployment is very low and output is still growing. But many things are moving in the wrong direction, and while it’s not an economic recession it’s a political one for Biden.
The window for Biden and his fellow Democrats getting a break on the economy and forestalling disaster in the November midterm elections is getting very small. Voter choice tends to solidify about six months before the election, barring dramatic change. That gives Democrats just a couple months for inflation to fall sharply and Americans to see some relief at the gas pump and the grocery store. Economists think inflation has peaked, but they also don’t foresee a dramatic drop in prices.
The Russian war in Ukraine is stalemated and sanctions on Russian energy are only likely to intensify, putting more stress on global energy prices. The Fed has indicated it will hike rates aggressively for at least the next several months, regardless of what inflation does. The Fed is trying to depress demand by raising the cost of borrowing, and it usually works. Sometimes it works too well, which is why markets are increasingly worried about a recession.
Biden isn’t the first president to be stung by high inflation. Beacon Policy Advisors points out that several other post-war presidents had low approval ratings similar to Biden’s, at the same point in their presidency. Harry Truman, Gerald Ford, Jimmy Carter and Ronald Reagan were all unpopular because of unusually high inflation. Ford and Carter lost their reelection bids, while Truman and Reagan won. So it’s possible for things to improve for Biden, and the rest of us. It can’t come soon enough.