The NPR Politics Podcast - After Months Of Inflation, Where Is The Economy Heading?

Episode Date: December 28, 2022

A huge number of voters indicated that the economy was their top concern in the midterm election — something that likely helped Republicans take control of the House of Representatives. But President Biden's party fared far better than expected given how persistent rising costs have been. So what's going on with the economy right now, and what could be coming down the road?This episode: political correspondent Susan Davis, White House correspondent Asma Khalid, and chief economics correspondent Scott Horsley.This episode was produced by Elena Moore and Casey Morell. It was edited by Eric McDaniel. Our executive producer is Muthoni Muturi. Research and fact-checking by Katherine Swartz.Unlock access to this and other bonus content by supporting The NPR Politics Podcast+. Sign up via Apple Podcasts or at plus.npr.org. Connect:Email the show at [e-mail] the NPR Politics Podcast Facebook Group.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Danielle Kurtzleben, I cover politics. And I'm Asma Khalid, I cover the White House. And we have a special guest. Scott Horsley is here, chief economics correspondent. Hello, friend. Great to be with y'all. And today we are going to talk about the economy in 2022. And we're going to lead off with some fresh data we learned this month that inflation has begun to slow in November prices were up 7.1 percent from a year ago that's down from a four decade high of nine percent in June now for President Joe Biden that was cause for celebration we shouldn't take anything for granted but what is clear is my economic plan is working and we're just getting started.

So, Scott, give us some perspective. Yes, it's good news, good-ish news, I would say, because 7% is still very high, right? Yeah, it is high. It's three and a half times what the Federal Reserve targets of 2% inflation. And it's, you know, three and a half times what we were sort of used to in the decades before the pandemic. But the president is right that we can clearly see now inflation coming down. It's still much too high, but it is clearly coming down, and it's coming down more broadly than it was, say, in July when Biden famously talked about 0% inflation for the month, which was mostly just a reflection of falling gasoline prices. The slowdown now is broader than that.

We're seeing it in a lot of goods as some of those pandemic kinks in the supply chain are starting to get ironed out. And we're also seeing it in, for example, in the November numbers, there was a drop in prices for things like airline tickets and hotel rooms and rental cars, travel-related expenses. And that kind of suggested the era of revenge travel, when people were willing to pay any price just to get out after being locked down for so long. That era is kind of coming to an end, and people are being a little bit more price conscious with their travel. And when travelers or shoppers get more price conscious, that helps to curb inflation. You know, there is real reason for the White House to feel a sense of optimism right now. I mean, where the economy has been, I would say, for the last five-ish months in terms of inflation is really different than where the economy was for the first six months of the year. I mean, if we look back, and I'm sure we did have one of these

year-ender economic conversations in December of 2021, inflation was consistently creeping up. And it did. I mean, for the first half of the year, you heard the administration essentially kind of throw spaghetti at the wall and try all kinds of different explanations to see what would make sense to the public. They would talk about supply chain kinks. They would try to explain that inflation was a global phenomenon, which it is, and that prices were rising in other countries. They tried to explain that Russia's invasion of Ukraine was affecting gas prices. And it didn't seem like any explanation was really sinking in. And it also didn't help that inflation was month after month going up. As Scott mentioned, though, I would say the last few months we've seen inflation

begin to dip, you know, if we're looking at year over year inflation. That all being said, though, 7% is still, it's still higher than where I would say many folks would want to be. It's still higher than where the White House would want inflation to be at this point as well. Right. Well, let's talk about that 7% number and what goes into it, because I know gas prices are down lately, but that has been offset clearly by rises in other costs. I know I've read that housing is a big one. Scott, what are some of the biggest components to that 7% inflation right now? Yeah, housing is a big one. And the way that housing is calculated in the official government statistics, there's kind of a lag. So the inflation numbers were sort of slow to capture the acceleration in housing costs, rental prices in 2021.

And they're now actually a little bit slow to reflect what is clearly a cooling in housing inflation. If you look at sort of real-time data of what rents are looking like, rental inflation probably peaked back in the spring. And so even though housing costs are high, we do expect the housing contribution to inflation to ease up in sort of the middle of next year. So you can kind of see the improvement on the horizon there. As I mentioned, a lot of goods prices have started to level off a little bit. The real challenge now is the cost of services, which is everything from healthcare to haircuts and restaurant meals and dry cleaning. Services other than housing make up about a quarter of all consumer spending. So it's a big piece of inflation. And the challenge there

is those are mostly driven by labor costs. The cost of dry cleaning is mostly the cost of the people that work at the dry cleaner. The cost of haircuts is pretty much what the barber makes. And labor costs have been climbing not as fast as inflation, but faster than usual because we've still got a very tight labor market. And rising wages is generally a good thing, but it's not in anybody's interest to have your paycheck get 5% bigger on paper if it's being gobbled up by a 7% price hike. So wages are going to have to rise less slowly in order to see real progress on those services costs. Well, one more question I have is also about recent news. It's about the Fed, which cranked up interest rates even higher this month to the highest level in 15 years. And this

is, of course, part of their job is to try to curb rising prices. But Scott, with inflation so stubbornly high, does the Fed seem confident in their ability to ratchet things down? Yes, they are confident, although it is certainly taking longer than they would have liked, and it's taking a sharper increase in interest rates than they would have anticipated. Several times each year, Fed policymakers put out a forecast of how high they think inflation is going to go, how high they think interest rates are going to have to go, and what they think is going to happen in the broader economy. And as a general rule throughout this year, each time they update their forecast, they project higher inflation and higher interest rates than the previous time. But they are getting closer now to where they

think interest rates need to be. And that's why, for example, when they raised rates in December, they only boosted interest rates by half a percentage point instead of three quarters of a point like they'd done the four previous times. Now, half a point is still a big rate increase. I mean, in normal times, the Fed usually moves interest rates only a quarter point at a time. So this has been a really aggressive boost in interest rates that seven times this year, the Fed has raised interest rates. They went from near zero back in March to just under four and a half percent now. And they're going to go a little bit higher. On average, Fed policymakers think they'll have to go up to a little north of five percent next year. But at that point, they think that rates will be high enough to start

to really put a dent in inflation. It doesn't mean the rates are going to turn around and start falling anytime soon. So we're going to have to kind of get used to this higher interest rate environment for a while. And that's having an effect. You see the impact on the housing market where home sales and home construction have dropped off. It's having effect for people who get a car loan. It also affects even just the interest rate on credit cards. So if you're carrying a balance on your credit card, you're paying more for that now than you were when this interest rate increase started. And Scott, won't there be other economic consequences? The Federal Reserve Chairman, I mean, basically is suggesting unemployment is going to need to go up in order to create a more stable economic

environment. Yes, that's right. Although there's a question about how much of an increase in unemployment this is all likely to cause. I mean, the Fed is definitely deliberately trying to take some of the steam out of the economy to slow things down. And generally speaking, that translates to some increase in unemployment, some loss of jobs. We haven't really seen that yet. The unemployment rate is historically low, 3.7% in November. The economy added more than 4 million jobs this year. Month after month, we've seen hundreds of thousands of jobs added.

So there's not really been any evidence of a slowdown in the job market yet. We have started to see some big tech companies announce layoffs, but the weekly claims for unemployment benefits remain really low by historical standards. So a lot of companies are reluctant to lay workers off, even if they see a little bit of drop in business, because they had so much trouble hiring workers. It's been so challenging to find workers as we've recovered from the pandemic recession that companies are much slower to hand out pink slips now than they were in pre-pandemic times. You know, we've seen businesses make adjustments to some of those supply chain challenges where they keep more inventory on hand now. There's less just-in-time and more just-in-case. And I think something similar is happening in the labor market.

For a long time, U.S. businesses sort of treated workers as a just-in-time commodity. And when business was good, they'd bring them on. And when business slowed, they'd let them go. But just as they're keeping safety stocks of toilet paper and other materials now, they're kind of keeping safety stocks of workers. And so hopefully, we won't see a big spike in unemployment as a result of this Fed action. All right. We are going to take a quick quick break and we will have more in a second. And we are back and we talked about inflation itself in the first half of the show. Now we are going to talk about the politics of inflation. Asma, you did a whole podcast episode on this and inflation showed up over and over in our polls.

I can tell you that voters over and over told me that inflation mattered most to them this year. And Republicans did win more votes nationally during the midterms while running on inflation by saying, in part, inflation is too high. But it was way, way closer than the lessons from past elections indicated it could be. So what do you make of the outcome of the midterms and how it relates to price increases? So I want to say two things here. I mean, one is I do think the polls accurately captured people's economic concerns. You know, you ask a Democrat, a Republican, an independent, chances are you spend some time outside a grocery store. People are going to say they are frustrated with the price of a whole host of grocery items that they are buying. I think the follow-ups are what we sort of got lost. One of the things is which party do you actually think will do something

better about inflation? Democratic analysts have made this point that essentially there's no party out there is saying that they are pro-inflation, right? I mean, both parties think inflation at this level is not a good thing. Andinflation, right? I mean, both parties think inflation at this level is not a good thing. And this was really different than, say, an issue like reproductive rights, where there were clearly Republicans and Democrats sat on different polar opposites, in some cases, you know, different sides on that issue. That was not the case on inflation. Both parties wanted inflation to go down. Now, you could argue that Republicans blamed Democrats for being this high, said that, you know, that this was Democrats' fault. On the flip side,

you know, you had Democrats also saying and acknowledging in some cases, including the president, yes, inflation is too high, but what are Republicans going to do about it? They're threatening to cut programs like Social Security or Medicare. And how is that going to help your cost of living? And so I think that that is part of what we didn't see capture in polls is that, yes, people are concerned with their own personal economy. But which party do they actually think will do something about it, I think, is very different. And I'm sure we'll talk more about this, but this all comes down to the idea that really how people view the economy is through a polarized lens, like pretty much everything in our politics now. And Republicans didn't really offer any prescription for inflation. They did, you know, lay a lot of the blame for inflation on the American Rescue Plan, the big spending bill that was passed in the early days of the Biden

administration by the Democratic Congress. And clearly the Rescue Plan had some role in higher prices in this country. They certainly put money in people's pocketbooks, which they use to fuel spending, and that put upward pressure on prices. But clearly, there were other factors as well, like the war in Ukraine. I mean, we are seeing high inflation around the globe, not just in the United States. And Republicans didn't really offer any prescription for how they would address inflation differently. I want to get back to something you were saying, Asma, about polarization, because I feel like when we talk about, yeah, this polling about people saying inflation is the most important issue this year, that's true. But we also know that what team you're

on plays such a big part in how you see the world. And I'm wondering about your take on the causality here. Is it that some voters saw high inflation and blamed Democrats and voted Republican? Or is it that people who were already inclined to vote Republican saw inflation as just another reason to do so? You know, that's an excellent question, Danielle. I would say I think it's more of the latter. You sort of view the economy through the team you're already on. What I will say surprised me, and I saw this pop up particularly in the state of Georgia, where I met more split ticket voters than I have in recent history, where there were some voters who had reservations about the Senate candidate, the Republican Senate candidate, who told me, yes, they were concerned

about inflation. Yes, they were concerned about rising prices. They did vote for the Republican for governor. But ultimately, they had other reservations in the case of the Senate candidate, and they decided to vote third party or vote for the Democratic candidate. And, you know, you pry and you push a little bit on inflation. And some people told me, well, you know, I recognize it's bad in other countries. Or yes, I recognize there's a war going on. And that probably affects us all. So I think people tend to view the economy increasingly kind of through the lens that fits their preconceived notions. But I will say, Danielle, one last point is I don't know that this is necessarily unique to this particular election cycle. I think it seems a little unique because inflation was very high. But I did reporting in

2018 when the economy was doing pretty well on the fact that a number of Democrats weren't going out and voting for Republicans in the 2018 midterms just because the economy was right. It's not like President Trump got credit for that economic situation at that time either. Scott, let me start with you. Looking ahead to 2023, what are you watching for in the economy? Yeah, well, it is certainly dangerous to make predictions. I talked about how the smart folks at the Federal Reserve have had to revise their own forecasts every few months here because the economy has just defied crystal balls. And there are just an awful lot of unknowns out there. We have seen how the war or the weather can cause big swings in the price of food and fuel. And you tell me how the war is going to go, I'll tell you how oil prices are going to go.

But nobody really knows what's going to happen in Ukraine. What happens to the price of services depends a lot on what happens to the labor market. And that in turn is a function of how many jobs do we add every month and how many workers stay on the sidelines or decide to come into the job market. It also depends on productivity. So there's just an awful lot of unknowns out there. I do think we're in for a period of slower economic growth and elevated inflation, but not as elevated as it has been in 2022. You know, Scott, you just mentioned crystal ball. And I don't know if I shared the story with you all, but when I was interviewing one of Biden's top economic advisors recently, Jared Bernstein, he showed me this picture he keeps on his desk of a shattered crystal ball. Because to that very

point, he says, you know, it's not like you can make a whole lot of predictions and know where things are going to go. I want to close out with one more question for you, Asma, given what you said earlier, because on the one hand, Scott Horsley just told us that, you know, we don't know what's going to happen in 2023. So I feel like asking you what's going to happen politically is setting you up for failure. So let me ask you something else, which is... Though I can tell you what the president said recently.

Okay, let's start with him. He was asked, you know, when inflation will essentially return back to normal. And he said he hopes by the end of next year. So that would be the end of 2023. But he did say, I can't make that prediction. So there you have it. Given what you said earlier about how people view the economy through particular partisan lenses, is the upshot here that just increasingly the economy has kind of lost its grip or maybe its effect on elections? Is that fair to say? I don't know. I wouldn't go that far. I think that the inflation situation right now, when

you talk to a whole range of economists, they will often point to external factors. And it is valid that inflation is worse in a whole bunch a war in Ukraine, that's made people interpret the economy here domestically, I think, a little differently than they would otherwise. I also think that, look, I mean, if inflation persists over the long run, if we see 1970s style inflation, I think that really does change the calculation. We are not really yet seeing anything like that. I don't think the economy has become irrelevant in elections. I think the economy definitely influences elections. I think in terms of the Democrats and the president, you know, what happens in 2024 is probably more important than what happens in 2023. And it's really the trend line, not the snapshot.

All right. We're just going to have to leave it there for today. But Scott Horsley, Chief Economics Correspondent at NPR, thank you so much. Always a pleasure. Until next time, I'm Danielle Kurtzleben. I cover politics. And I'm Asma Khalid. I cover the White House. And thank you for listening to the NPR Politics Podcast.