The White House embraced “Bidenomics” to describe its economic agenda last month, reclaiming a term that President Joe Biden’s detractors have frequently used as a pejorative. Various administration officials have since talked up its ambitions. I have no doubt that they're sincere about the importance of the middle-class, infrastructure investments and union jobs with an eye to the presidential election, but this is really a gamble on inflation — the tax that has hit middle-class pocketbooks hard these past two years.
President Joe Biden’s team is betting that moderating price pressures, and the significant future declines in inflation already baked in, will boost consumer confidence and his standing with voters. The shifts we've already seen in the past few months suggest it’s a smart move.
One of the architects of this strategy is likely Lael Brainard, a long-time member of the Federal Reserve who became the head of the White House National Economic Council in February. Her final Fed speech in January outlined why inflation was likely to fall in the future. Speaking about shelter inflation, which comprises over 40% of the core reading in the Consumer Price Index, she said, “the decline in rent on new leases will show through to average rent over time, and declines in housing services inflation are expected by the third quarter of this year.”
It’s now the third quarter. Last week’s CPI report showed that shelter inflation increased at an annualized rate of 4.5% in June, the softest reading since January last year. Importantly — and Brainard knows this — big further declines are on the way. As Joseph Politano noted in a substack post last week, a rent index developed by researchers at the Federal Reserve Bank of Cleveland, the New Tenants Repeat Rent (NTRR) Index, shows practically no price pressure in the new lease market.
This is important because the NTRR Index leads the measures of rent used by the CPI report by as much as a full year. Brainard noted this in a speech on Bidenomics last week, saying: “Annual core CPI inflation has now fallen and is projected to decline further as rents decelerate.”
Shelter inflation, as reported by the CPI, has increased by 7.8% over the past year. This is up significantly from the 2010s, when it hovered in a range of 2% to 3%. With the NTRR Index reading around zero (and trending down), shelter inflation as measured by CPI should not just decline a year from now, there's a good chance it will be lower by the middle of 2024 than it was during the 2010s.
This is a big deal. If everything else in the CPI report is held constant and shelter inflation drops from 7.8% to 2%, core CPI would nearly halve — going from its current 4.9% to 2.5%.
My Bloomberg Opinion colleague Jonathan Bernstein recently made the point that Biden needs to push as hard as he can to convince marginal voters that his policies have been an economic success. Plus, he must counter Republicans who will spend the next year bashing the economy and blaming him.The Biden bet is that a decline in inflation will buttress consumer confidence and boost his approval rating, which has been hovering around 40% with the economy the top concern. Last week's University of Michigan consumer sentiment index, which reached its highest in nearly two years, is already pointing in that direction.
The current situation is incredibly unusual: inflation is the primary economic concern for households and, because of the way it’s calculated, the White House can have a high level of confidence about its direction over the next year. That’s about the time voters will make up their minds about the president's record on the economy. The Biden administration believes that the only thing holding back his approval rating is inflation. Infrastructure and clean energy jobs are fine things to run on, but they’re betting on the course of inflation to seal the deal.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.
