Updating Biden's Inflation Problem
Why the June CPI report is not good news for the President
Today’s CPI report for June was unmistakenly good news for an inflation-targeting Federal Reserve. On a seasonally adjusted basis, the overall headline CPI fell -0.1% from May to June following no change in the prior month (May relative to April). Comparable good news was evident for the underlying or so-called core CPI (total less the volatile food and energy components), which has been on a steep downward trajectory over the past three months, with seasonally adjusted increases going from 0.3% (April) to 0.2%(May) to just 0.1% (June). On the more widely followed year-over-year basis, the total CPI was up 3.0% in June and just 3.3% for the core — the best news for underlying inflation since April 2021.
But consistent with an article I wrote for Project Syndicate a few weeks ago (“The Defining Economic Issue of the US Election”), the June CPI report was not unalloyed good news for US families and certainly not good news for the incumbent president, Joe Biden. As I argued in that piece, the problem for Biden boils down to the important distinction between the rate of change in prices (the inflation rate) and the level of the CPI price index.
The following are the June updates on the CPI price level, consistent with the methodology of last month’s article: The headline index inched up to 20.11 percentage points above the level when Biden was sworn into office in January 2021; last month, that comparison had been slightly lower at 20.07 percentage points. That’s a simple example of the arithmetic of aggregate price measures — very small readings on monthly inflation still boost the now elevated price level.
In the Project Syndicate piece, I stressed that it was important to make the distinction between the current elevated price level and that which would have prevailed had there been no Covid-related inflation shock and the CPI had stayed on its 1.5% pre-Covid trajectory that prevailed for seven years, from 2014 to 2020. On that basis, compared with Biden’s first month in offfice, the June 2024 CPI is still elevated by 14.8 percentage points relative to its pre-Covid path; that is a fractional improvement from the 14.9-percentage point calculation for May.
My hypothesis is that American families (aka voters) care much more about elevated price levels than the rate of change. Economists, who continue to fixate on core inflation and other so-called sophisticated filters of price fluctuations focus more on the latter, while politicians are held accountable for the former. Yet that is a clear disconnect with real time experience at the checkout counter that, by definition, always flashes price levels. That, in a nutshell, is Biden’s political problem with inflation — a still elevated price level that American voters continue to feel in their wallets. For a president who has had more than his fair share of bad news since the infamous presidential debate on June 27, there is little to celebrate in the June CPI report.