Inflation Is Fading, Statistically and Politically

Last week was full of speeches. Most of those that attracted national attention were at the Democratic National Convention, culminating in Vice President Kamala Harris’s big moment on Thursday. But there was another important speech on Friday: Federal Reserve Chair Jerome Powell’s talk at the Fed’s annual shindig in Jackson Hole, Wyo.

Yes, Powell’s remarks were of particular interest to investors looking for clues about future monetary policy. But even though his speech was rigorously apolitical, it had important political implications. For what we’re seeing, I’d argue, is inflation fading away — not just in the data, but also as a political issue. And that, of course, is very good news for Democrats.

About Powell’s speech: He noted that the inflation rate has declined a lot since it peaked in 2022 and expressed confidence that it’s on track to reach the Fed’s target of 2 percent — and why it’s getting there without the mass unemployment some economists had claimed would be necessary. Falling inflation all but guarantees that the Fed will cut interest rates at its Open Market committee meeting next month, although the size of the anticipated cut is uncertain.

What has brought inflation down? Like many economists, myself included, Powell believes that inflation was largely caused by “pandemic-related distortions” and that “the unwinding of these factors took much longer than expected but ultimately played a large role in the subsequent disinflation.”

Although Powell didn’t and couldn’t say so explicitly, this analysis implicitly exonerates the Biden administration. Many people, like Elon Musk — who, after demonstrating his political acumen last year by boosting Robert Kennedy Jr., has lately decided that he’s an expert on macroeconomics — attribute inflation to Biden-era government spending. Powell’s discussion suggests, however, that fiscal policy played at most a distinctly secondary role.

But few voters follow Fed speeches; won’t they continue to blame Democrats for inflation?

Not necessarily. Surveys suggest that the political salience of inflation and the economy in general have been fading. It’s probably too late to convince voters that Democrats have done a good job managing the economy, even though that’s objectively the case — overall, America has outperformed other wealthy nations, achieving exceptionally high growth without exceptionally high inflation. But the economy is looking less and less like the, um, trump card Republicans were counting on.