Voters are getting payback for the inflation crisis

The unemployment rate in the United States is hovering near historic lows. The stock market is on a tear – great news for the 62 per cent of American adults with exposure to equities. And the U.S. economy is growing so quickly that peer countries would gladly trade places.

In the end, none of this mattered for the Democratic Party, which was handed an emphatic defeat in this week’s presidential election.

Any number of theories for the party’s misfortunes will be proffered in the weeks and months ahead. But the roots of their demise may come down to something very simple: People hate inflation. It’s a message that voters around the world have hammered home repeatedly over the past two years.

“Incumbent governments are going down to defeat, and the two salient issues seem to be inflation and, to some extent, immigration,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

“There was clearly a global dimension to the price shock,” he added. However, “in every country, voters have blamed their own government for the inflation that they saw.”

Shortly before election day, voters in Pennsylvania – a key battleground state – said that inflation was their top issue, ahead of immigration, abortion rights and “preserving democracy,” according to survey results from the Marist Institute for Public Opinion. Donald Trump would go on to win the state, one of several that he wrestled back from the Democrats after his defeat in 2020.

The mood in the U.S. has been glum for a while. The University of Michigan consumer confidence index reached an all-time low in June, 2022 – the same month that inflation in the U.S., as measured by the Consumer Price Index, hit an annual rate of 9.1 per cent, the highest since the early 1980s.

Consumer sentiment has improved over the subsequent two years, much as inflation has. (Annual CPI growth hit 2.4 per cent in September.) But the Michigan index remains considerably weaker during the presidency of Joe Biden, relative to sentiment during Mr. Trump’s first term.

Financial commentators have struggled to reconcile scorching U.S. economic numbers with the sanguine mood.

Jason Furman, who served as the chair of the council of economic advisers during president Barack Obama’s second term, said on X (formerly Twitter) Wednesday that there was “cherry picking” of statistics that made the situation seem rosier than it was.

Mr. Furman noted that millions more people were living in poverty and that mortgage rates had increased significantly. Adjusted for inflation, median household income was lower than in 2019, he said.

There’s also the simple fact that price levels are much higher than they were a few years ago. Consumer prices in the U.S. have jumped 20 per cent since Mr. Biden’s inauguration in January, 2021. (Prices in Canada have risen 16 per cent over the same period.)

Making matters worse for the party, people also despise the remedy for inflation: higher interest rates. While inflation is settling down, the Federal Reserve announced just the second interest-rate cut of this easing cycle on Thursday. Higher borrowing rates have made it more expensive to finance home purchases, among other things.

A working paper from the National Bureau of Economic Research, published in February, said that borrowing costs go a long way in explaining the downbeat mood.

“The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favoured by economists and the effective costs borne by consumers,” read the paper, whose authors included Lawrence Summers, a former treasury secretary from 1999 to 2001 under then-president Bill Clinton. “We show that the lows in U.S. consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply.”

The irony is that Mr. Trump’s proposed policies – notably tariffs and mass deportation – are widely expected to put upward pressure on inflation. “Across-the-board tariffs would certainly hit American pocketbooks once again,” Mr. Shenfeld said. And, if inflation reignites, that would mean higher interest rates than otherwise.

Canada is on a decidedly different track. The annual inflation rate ebbed to 1.6 per cent in September and the Bank of Canada is cutting interest rates more aggressively than its U.S. counterpart to stimulate growth. (The BoC has cut its policy rate four times since June.)

“The facts are inflation and interest rates have come down faster and further than in the U.S. That’s real relief for Canadians,” Deputy Prime Minister Chrystia Freeland told reporters on Wednesday.

But she also noted that “inflation has hurt people.” If the polls are correct, Canadians will punish the federal Liberal Party for this at the next federal election.

With a report from Jason Kirby