This week in Bidenomics: Inflation kills the Democrats’ momentum

President Biden and his fellow Democrats had the wind at their backs as summer ended. Gasoline prices were plunging, the job market remained strong and there was hope inflation might soon subside. Consumer confidence was ticking up, and with it, Biden’s approval rating.

That rally is over. For the last two months, inflation has proven to be more stubborn than anybody would like, leaving Biden stuck explaining declining living standards as voters head into the midterm elections.

Inflation peaked at 9% in June, as oil and gas prices spiked. Then energy prices fell, fueling hope that overall inflation would drop by similar margins.

It didn’t. Inflation for September came in at 8.2%, a huge disappointment to politicians, investors and consumers hoping inflation might be under 8% by now, or even under 7%. The Federal Reserve has been jacking up interest rates since March, to make borrowing more costly, bring down demand and get prices under control. So far, there’s nothing to show for it. Meanwhile, mortgage rates are soaring. The stock market is short-circuiting. The odds of the Fed causing a recession may now be 50-50 or worse.

Persistent inflation leaves Congressional Democrats running for reelection with a weak pitch to voters. Republicans, by contrast, can claim that two years of Democratic control have wrought the worst inflation since the end of Jimmy Carter’s presidency. Biden isn’t responsible for most of the price hikes, but that probably won’t matter to voters who are in a pretty foul mood and are usually inclined to blame the incumbents.

The drop in gas prices since June has correlated with a rise in Biden’s approval rating. Gas prices hit $5 per gallon in June but have since fallen back to around $3.90. Biden’s approval rating bottomed at 38% in July and has since popped up to around 43%. For Biden, so far, so good.

But gas prices hit a floor in mid September and don’t seem likely to fall much further, given that global oil markets remain tight. For Democrats to have a shot at keeping control of Congress in the midterms, Biden’s approval rating probably needs to be at or above 50%. Barring some extraordinary development, there’s no way he’s going to get close to 50% with inflation still stalking the economy.

The president’s party normally loses ground in the midterms, and the Democrats’ narrow majorities in both the House and Senate make Democratic control of Congress especially fragile. There have been a few signs they might buck the trend and stay in charge. In August, for instance, “generic ballot” polling flipped, showing voters prefer Democratic control of Congress over Republican control, by a tiny margin. That may have reflected the conservative Supreme Court’s overturn of national abortion protections in June. Some Democratic strategists started to think their party could pull off a November upset.

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But that would have required everything to go right for Democrats in the election home stretch, and inflation is the spoiler. “The momentum is clearly tilting toward the GOP, as polls show that anxiety is rising again among voters over stubbornly high inflation,” Greg Valliere, chief strategist at AGF Investments, wrote in his October 14 newsletter. “Republicans are headed for a very good night on Nov. 8.”

As disappointing as the latest inflation report is, it does include a few encouraging signs. Inflation is shifting from goods to services, which is an important pivot that will correct some of the deep distortions of the COVID downturn. Bank of America expects that disinflation in goods will soon lead to deflation—actual price declines in things like cars, appliances and other consumer products. There’s also been a surge in airfares, which indicates strong demand for travel and consumers willing to spend money on discretionary experiences. That’s a good thing.

The problem, however, is that inflation has now hit staples like food and housing, making it inescapable for many ordinary Americans. The Fed’s aggressive monetary tightening will probably work, eventually, and force these prices down. Fed policy operates with a lag, however, and it’s now clear it’s not going to help Democrats this election cycle.

There are still a couple of wild cards in the midterms, including the Supreme Court’s abortion rights ruling, which is broadly unpopular. It’s still possible that could produce a surge in Democratic turnout that polls aren’t picking up. Russia’s war in Ukraine is dangerous and unpredictable, with Russian President Vladimir Putin threatening to use nuclear weapons (and probably bluffing). If Americans vote on the economy, it will benefit Republicans, which means the Democrats’ best hope at this point is that something else will motivate voters. Plausible, but unlikely.

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

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