The chart below (which has been circulating around in recent weeks/months) shows the dynamics of President Biden’s approval rating vs. US CPI inflation in the past year. Even though there have been multiple factors driving the popularity of US Presidents over time, we can agree that the surge in inflation has been one of the major factors behind the sharp fall in Biden’s approval rating in the past twelve months (from 54% in February 2021 to 43% in latest polls).
It is an interesting chart, though it is incomplete. US inflation will remain one of the major themes in markets for 2022 as inflationary pressures are likely to stay elevated longer than what policymakers previously anticipated. Therefore, the Fed will come under tremendous political pressure this year to tighten aggressively to ‘accelerate’ the convergence of inflation back towards its target.
Will Biden’s popularity surge back above the 50% threshold if inflation falls as the Fed tightens?
US politicians must not forget the ‘wealth effect’ factor and the importance of the dynamics of equities in the medium term. An aggressive tightening is likely to weigh on risky assets in the coming year after experiencing a tremendous rally in the past two years following the Covid19 shock. Hence, the impact of inflation Biden’s approval needs to be conditioned on equity market’s performance.
Is it better to have a 7%+ inflation and trending markets or 3% inflation and equities down 25%?