This week in Bidenomics: The inflation Rorschach test
10/26/2024 21:11
Voters think about inflation in different ways, and small variations could have an outsized influence on this year's presidential race.
What do you think about inflation? Like, really?
Most Americans think inflation is too high. But different people ponder inflation in different ways, and these quirks of human psychology could end up determining the outcome of this year’s presidential election.
Inflation is obviously a huge voter concern. The annual inflation rate peaked at 9% in 2022 and has steadily fallen back to 2.4%, which is close to normal. But prices are up a cumulative 20% since President Joe Biden took office, while incomes are up just 18.1%. During the Biden presidency, the typical worker has fallen slightly behind.
When Donald Trump was president, the total rise in prices in October of his fourth year was just 7.6%. Incomes during the same time frame rose 13.5%. So the typical worker was getting ahead. That’s the most concise way of explaining why some voters think the economy was better under Trump.
This matters now because voters have to decide whether they’d be better off during the next four years under Trump or under Vice President Kamala Harris, who by association carries the baggage of Biden’s inflation surge. And it could all turn on how small numbers of swing voters in seven swing states contemplate inflation.
Read more: Trump vs. Harris: 4 ways the next president could impact your bank accounts
Forecasting firm Oxford Economics runs an election model based on economic conditions in each state and patterns in past elections. A stable and growing economy, as we have now, is normally bullish for the incumbent party, in this case Kamala Harris’s Democrats. But inflation is a bent cog that jams the election machinery.
Oxford accounts for inflation in two ways. One is a “sticker-shock” model in which voters still feel stung by the cumulative increase in prices during the last three years. In this model, Trump wins six of the seven swing states — Georgia, North Carolina, Pennsylvania, Wisconsin, Arizona, and Nevada — while Harris only wins one, Michigan. Trump wins the presidency with 297 electoral votes.
The other model is based on the “misery index,” or the sum of the unemployment and inflation rates. The current misery index, 6.5, is low by historical standards because the current rates of inflation (2.4%) and unemployment (4.1%) are both in the green zone. The misery index has averaged 9.2 since 1948 and 8.3 since 2000. At the same point in Trump’s presidency, the misery index was 8. So by this measure, the Biden economy is doing slightly better than Trump’s one month before the election.
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In Oxford’s misery-index model, Harris wins North Carolina, Pennsylvania, Michigan, Wisconsin, and Arizona, putting her over the top with 281 electoral votes. In each outcome, the race is remarkably close, with the vote in Pennsylvania and Wisconsin decided by 0.3 percentage points or less.
Which model applies? Who knows. “It is difficult, if not impossible, to know which model will most accurately capture the extent of voter discontent,” Oxford conceded. The misery-index model has better historical results, but the sticker-shock model probably applies better to millions of lower-income voters.
Other election models provide little additional clarity. The Moody’s Analytics election tracker is a toss-up, with a marginal edge toward Harris due to falling gas prices and a slight decline in mortgage rates. The RealClearPolitics polling average is statistically tied. Betting markets favor Trump, but those are not the same as polls and they may overstate Trump’s odds of winning.
There’s a logical fallacy implicit in the outsized role inflation is playing in the 2024 election: Past performance has nothing to do with future results. Trump did nothing special during his presidential term to keep inflation low. He simply came into office at the tail end of a long disinflationary era that ended with the 2020 COVID pandemic and massive amounts of stimulus spending approved by both political parties. Biden did nothing unusual to worsen inflation, except for signing the fourth of four large stimulus bills into law.
There’s also irony. Trump’s plan to slap new tariffs on more than $3 trillion worth of imports is inherently inflationary since tariffs are a tax that raises prices. That’s why many economists think inflation would be higher under Trump than under Harris. Team Biden, by contrast, has been so politically damaged by inflation that Harris and other Democrats may be instinctively reprogrammed to make sure it never threatens them again. If they get the chance.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on X at @rickjnewman.
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