Goldman Sachs says political scare ads highlighting inflation could stoke high prices even higher
As the U.S. approaches midterm elections, the influx of political advertisements highlighting rising inflation under the Biden Administration is likely to stoke even more inflation and lead to further monetary policy tightening, a Goldman Sachs note published Thursday said.
Beyond further increases in food and gas prices, “another key upside risk is the coming barrage of political advertisements highlighting high inflation ahead of the midterm elections in the next few months,” Goldman Sachs wrote.
Inflation expectations can become self-fulfilling prophecies. When concerns over inflation rise, workers are often motivated to ask for higher wages to offset the rising price of fuel and food. This, in turn, results in companies raising prices for their goods to offset higher labor costs, spiraling inflation further upwards—something referred to in macroeconomics as a wage-price spiral.
Today, with inflation already at its highest level in four decades, it is expected to be a major point in the coming midterm elections. “Inflation expectations have historically been quite sensitive to political outcomes, and voters report that inflation will be one of the main issues this fall,” Goldman Sachs said.
How political ads raise interest rates
At the latest Federal Open Market Committee (FOMC) meeting, the Fed hiked rates by 75bps to tame runaway inflation.
According to Goldman, this decision was largely made on the back of inflation data released by the University of Michigan, which saw consumer confidence tumble to fresh lows of 50.2 in June. University of Michigan researchers measure consumer confidence by asking at least 500 people questions such as, “By about what percent per year do you expect prices to go (up/down) on the average, during the next 5 to 10 years?”
“The jump in long-run inflation expectations in the Michigan consumer survey was the main reason why the FOMC hiked by 75bp at its June meeting. The Fed’s strong reaction indicates a heightened sensitivity to any further upward drift in inflation expectations,” Goldman said in its note.
While there is little academic evidence specifically linking political ads and consumer inflation expectations—mainly because inflation has not been this significant a campaign issue in recent decades—there is research to indicate that inflation expectations do shift when new information (such as that contained in ads) is provided.
And as inflation expectations shift, so does the Fed’s response.
“Fed officials might feel compelled to respond forcefully to even moderate further increases in long-run inflation expectations,” Goldman says.
“We see the upcoming onslaught of inflation-focused political advertisements as adding to the risk that the Fed could continue to tighten aggressively even if economic activity decelerates sharply.”
Putin’s inflation or Biden’s inflation
As pessimism toward the Biden Administration rises and Biden’s approval rating falls—it dropped for the fourth straight week, to 36%, according to a Reuters Ipsos poll—there is broad consensus among Americans that the President isn’t doing enough to combat inflation. Around 80% of people polled by SSRS for CNN said the government wasn’t doing enough to combat inflation; only 23% said economic conditions were somewhat good.
Republicans have made it a point to blame rising inflation the on Biden Administration rather than the War in Ukraine.
And Fed Chair Jerome Powell may agree.
When questioned by Bill Hagerty on Wednesday at the Senate Banking Committee hearing, Powell contradicted President Biden, who has repeatedly said Russia’s invasion of Ukraine is the primary driver behind inflation in the U.S.
“Given how inflation has escalated in the past 18 months, would you say that the War in Ukraine is the primary driver of inflation in America?” asked Hagerty
“No inflation was high, certainly before the war in Ukraine broke out,” Powell said.
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