Donald Trump has pushed his economic plans to address "affordability," while at the same time arguing that higher gas prices and their impact on inflation are small prices to pay to keep Iran from developing a nuclear weapon. So far, that argument appears to have resonated, even with Democrats and the media playing stupid games with Trump's argument.
That doesn't mean the problem has gone away, however. Today's report on the Consumer Price Index provides an uncomfortable reminder less than three weeks before Election Day:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent on a seasonally adjusted basis in September after rising 0.4 percent in August, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.7 percent before seasonal adjustment.
The index for gasoline rose 9.1 percent in September, accounting for over half of the monthly all items increase. The energy index increased 5.2 percent over the month following a 2.1-percent increase in August. The shelter index rose 0.4 percent in September after rising 0.3 percent in August. The index for food was unchanged in September, as the index for food away from home increased 0.2 percent and the index for food at home fell 0.1 percent.
The index for all items less food and energy rose 0.3 percent in September, as it did in August. Indexes that increased over the month include recreation, used cars and trucks, education, airline fares, medical care, and apparel. Conversely, the index for communication was among the small number of major indexes that decreased in September.
As the data shows, this is almost entirely related to fuel prices, and perhaps mainly related to diesel. Almost every other general category shows mild inflation of the kind associated with strong economic growth. Even inflation in electrical (4.4% annual) and natural gas (5.0%) utilities shows moderate inflation at worst. Fuel and fuel oil prices have increased by 20.4% overall this year, and in just this month, have shot up by 9.3% overall in September alone, with fuel oil up 15.3% last month after a 10.1% increase in August.
That inflation is finally leaking into other categories as transportation costs amplify the effect. Core inflation – less food and energy – has now hit 2.6% annualized inflation, still not bad but the highest in four months. The overall inflation rate of 3.7% is the highest since May's 4.2% reading.
None of these are disastrous, nor do they hint at the prospects for runaway inflation seen in 2021-23. The fundamentals of the U.S. economy, and especially its supply chains, are sound. This inflation is entirely related to the oil crisis in the Strait of Hormuz and now the Bab el-Mandeb Strait off of Yemen. Trump is entirely correct to frame this as a cost of forcing the IRGC to either abandon nuclear weapons and terrorism or collapse as Iran's economy craters.
However, that is still a real cost, and it's coming just as voters are making decisions about the direction this country has taken. Affordability was already an issue, and while wages are still growing, they're not keeping up with this inflationary pace, pushing net "real wages" into negative territory. That may be a bigger issue for Republicans as Election Day nears.
The Wall Street Journal hits the panic button:
Some economists see the September report as a worrying sign that the Iran war wasn’t just a one-off price shock and that higher inflation is here to stay unless the Fed acts. “It’s already becoming a prolonged issue” seven months into the war, said Stifel’s Piegza. One particular concern: Surveys show that consumers now expect higher inflation in the years to come, which can become a self-fulfilling prophecy if they rush into purchases to get ahead of price increases.
Respondents in the University of Michigan’s latest consumer survey said they expect inflation of 4.7% over the next year, up from 4.6% in last month’s survey. Five-year inflation expectations also rose, to 3.5% from 3.4%.
Other economists are more sanguine, pointing to falling real wages as a sign that inflation is likely to come down again. “Right now the labor market looks weak,” said Pantheon’s Tombs.
There's no reason to hit the panic button. As Tombs points out, the bigger risk here is that the Fed will overshoot rate increases and chill the labor market just to deal with a mild-if-prolonged oil shock. The Fed already indicated that rate hikes would be part of its future, and this will push them to accelerate that plan. The real resolution to this will be in when and how the current war against the IRGC ends.
In the meantime, though, voters may not be inclined to give Trump and the GOP a pass on inflation. That's not a reason to panic either, but it means that Republicans will have to push their message even harder on the economy, or convince voters that the radical revolutionaries that have seized control of the Democrat Party are a far greater threat than a moderately elevated level of inflation. At least that message has the virtue of truth.