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Inflation, recession and the 2022 midterms

‘Stagflation’ bedeviled Jimmy Carter in the 1970s

House Minority Leader Kevin McCarthy, R-Calif., discusses inflation during a news conference in March. In a new survey,   more Americans trust Republicans to do a better job handling inflation than trust Democrats.
House Minority Leader Kevin McCarthy, R-Calif., discusses inflation during a news conference in March. In a new survey, more Americans trust Republicans to do a better job handling inflation than trust Democrats. (Tom Williams/CQ Roll Call file photo)

ANALYSIS — With six months to go until the 2022 midterm elections, the economic indicators continue to deteriorate for Democrats. While unemployment remains low and the economy continues to grow (except for a recent hiccup that few take seriously), inflation is up dramatically, and interest rates are spiking. 

The inflation rate hit 5.4 percent in June 2021, 7 percent in  October, and 8.6 percent in March 2022, and that surge in inflation increasingly has economists and some in the business community worrying about inflation and a possible upcoming recession — just the combination that ended President Jimmy Carter’s electoral career prematurely.

Deutsche Bank has already changed its prediction from a “mild” recession to a more severe one. “We will get a major recession,” Deutsche Bank economists wrote to clients recently, according to CNN.

And then there is former Treasury Secretary Lawrence Summers. He wrote in a Washington Post op-ed piece on April 5 that “over the past 75 years, every time inflation has exceeded 4 percent and unemployment has been below 5 percent, the U.S. economy has gone into recession within two years. Today, inflation is north of 6 percent and unemployment is south of 4 percent.”

Summers, who was Treasury secretary under President Bill Clinton, now sees an 80 percent chance of a U.S. recession by next year.

Of course, many economists dispute the idea that a recession is inevitable, including the folks at Goldman Sachs who argue, “We do not need a recession but probably do need growth to slow to a somewhat below-potential pace, a path that raises recession risk.”

“Inflation should ease from current levels, and we do not expect a recession from rising interest rates,” the chief investment officer at UBS Global Wealth Management echoed recently.

Even those who expect a recession don’t see it as imminent. The Federal Reserve will take its time raising interest rates, they argue.

But just the threat of an economic slowdown, especially combined with voters’ concerns about higher prices for food, gasoline and pretty much everything else, would rattle the public’s confidence and puts Democrats even more on the defensive. 

If President Joe Biden stresses that the economy is still growing, he risks looking out of touch. And it he turns to a revised “Build Back Better” plan, he has to call for more government spending during a period of inflation — not exactly an ideal place to be.

The president doesn’t have a lot of options when it comes to trying to slow inflation. It’s the Federal Reserve, after all, that is tasked to assure price stability, and the Fed may well have already miscalculated.

As Fortune’s Megan Leonhardt wrote in a March 2022 interview with the president of the Federal Reserve Bank of San Francisco: “As inflation continues to soar to heights not seen in four decades, many Americans are wondering why the Federal Reserve and other officials didn’t move sooner to curtail skyrocketing prices. In fact, for much of 2021, Fed Chair Jerome Powell and other leading economists referred to inflation as ‘transitory,’ arguing that it was derived primarily from supply chain bottlenecks and other pandemic-induced slowdowns that would soon ease. But starting in December, Powell changed his tune, saying it was a good time to ‘retire’ that word when describing the current inflation environment.”

Of course, it really doesn’t matter who missed the boat on inflation. The one thing certain is that an incumbent president will get the blame. Indeed, Biden already has. 

The new, April 24-28, 2022, Washington Post/ABC News poll, for example, found that only 28 percent of adults approved of the job Biden is doing on inflation, while 68 percent disapproved. On the economy as a whole, 38 percent of adults approved of Biden’s handling, while 57 percent disapproved.

The survey also showed that 50 percent of Americans trust Republicans to do a better job handling inflation, compared to only 31 percent who trust Democrats. 

Either inflation or rising unemployment would be a considerable problem for Democrats in 2022 and again/or in 2024. Both at the same time — stagflation — obviously would be a nightmare for Biden and his party. 

Of course, anyone who has been around for a while knows that predictions about the economy and the stock market are even less reliable than the promises of a snake oil salesman.

The problem for Biden is that snake oil salesmen seem to be having a pretty easy time selling their snake oil these days.

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