Prices are up 8.5% from July 2021, the Labor Department says, but President Biden wants to talk about the monthly figure. So is inflation really cooling? Will Democrats take credit, though the House has yet to pass the Inflation Reduction Act? And might the Federal Reserve slow its pace on interest rates? Plus, Tim Michels wins the GOP gubernatorial nod in Wisconsin with the help of Donald Trump's endorsement, and Rep. Ilhan Omar narrowly beats a primary challenge in Minnesota.
This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.
Announcer: From the Opinion pages of the Wall Street Journal, this is Potomac Watch.
Kyle Peterson: What to make of the new inflation figures, as well as the political verdicts rendered by voters in Wisconsin and beyond. Welcome. I'm Kyle Peterson with The Wall Street Journal. We're joined today by my colleagues, columnists Allysia Finley and Kim Strassel. Welcome to you both. The Labor Department on Wednesday released new inflation figures in the consumer price index. And the first bit of good news is the dip in the year-over-year figure, from July 2021 to 2022. Prices rose 8.5%. That's a small drop from last month's figure of 9.1%. But even more intriguing is the month-over-month increase reported today. And that was 0%. And here is President Biden, enthusing on Wednesday about that figure.
President Joe Biden: Actually, I just want to say a number. Zero. Today, we received news that our economy had 0% inflation in the month of July. 0%. Here's what that means. While the price of some things went up last month, the price of other things went down by the same amount. The result, zero inflation last month. But people were still hurting. But zero inflation last month. When you couple that with last week's booming jobs report of 528,000 jobs created last month and 3.5% unemployment, it underscores the kind of economy we've been building.
Kyle Peterson: Allysia, can you give us a better sense? As the president said, some things went up and other things went down. Can you give us a better sense of how this all nets out? And is it too much to hope for, that we're now past the peak inflation?
Allysia Finley: I think you still have to keep in mind that inflation or the CPI is still up 8.5% year-over-year. The main reason that the overall CPI went down or has been flat was because of declining energy prices, particularly gasoline and as well as natural gas, which had really spiked during the spring in part due to the war in Ukraine. But gasoline and natural gas prices have both fallen in part because of concerns that the economy is slowing down, both the US and the global economy, and the demand is declining. So you've seen oil and gas prices actually moderate some. And that was really the main contributor to the flat CPI. But you also saw the modulation in energy prices filter through to some other things like airfares. Airfares had been increasing throughout the spring. And those actually declined. You also saw a decline in rental cars, in hotels. Which is interesting, because we continue to hear that there is still very strong demand for travel, but we actually saw a decline in those industries, continued increases in food, that we are not seeing food prices moderate at all. Those are things that really hit consumers because that's what we disproportionately spend money on, especially the low income folks. You actually saw Tyson reported earlier that consumers have been shifting to lower price cuts of beef and chicken, increasingly chicken, as they try to pare back their spending. And the spending report the other month, actually showed that people are actually buying less groceries. And that's one way they're trying to cut back. So I don't think there's much consolation in this CPI report. I think you're going to get a one month flat-line, but I think other prices of rents are continuing to increase. You're seeing the price of rent of shelter or the primary residents that actually went up. And I think that will continue to contribute. There's still a lot of wage pressure in the economy and markets. And you're seeing that manifest in the labor reports and that's going to continue to filter through to higher service prices and medical services for instance. And other healthcare services have continued to increase. So I think this is a one-month respite from skyrocketing prices, but I don't think we've conquered inflation as Joe Biden seems to suggest.
Kyle Peterson: That seems to be the big question, how much this inflation dynamic has been entrenched in services and across the broader economy. And the number that economists like to point to is core inflation, minus food and energy, because food and energy are more volatile. So the idea is that core inflation provides a better sense of the overall trend. And year-over-year, that's still at 5.9%. And similar to the overall number, the month-to-month figure, June to July is relatively low compared to the recent trend. So from June to July, all items less food and energy up 0.3%. But I guess I would make two points, Kim. One is that annualized, that is still a pretty high figure, I think higher than the fed definitely wants it. And the second is that those numbers can be a little bit noisy. And as Allysia suggests, this might be a one-month respite before we get some higher numbers again. So the number again from June to July is 0.3. Well, if you look back, that's the same figure that we had in March, of 2022, which was soon after followed by 0.6 and 0.7 in the subsequent three months.
Kimberley Strassel: Right. This is one month. And as you say on an annualized basis, that is still way higher than the Fed would want it. The Fed's target inflation rate is about 2%. So we are running well beyond that. And if you dig into the figures that made up that core index, it's a little disturbing. There are still huge areas where we saw price increases across the board, as Allysia was noting, in shelter, in medical care, in motor vehicle insurance, in home furnishings and home services, in new vehicles, in recreation. There were a few areas that did drop, used vehicles, airline fares, communication. But overall, the trend is still that in significant portions of the economy, excluding food and energy, numbers are going up. And as for that monthly change of zero that the President was bragging about, again, that really is almost entirely a function of gas prices dipping and therefore offsetting some increases in big things like groceries. For the record, grocery prices are running 13.1% increase year on year, which is the fastest inflationary pressure since 1971. And these are the things that people really feel in their pocketbook. So the President can stand there at the podium. People can feel happy that going to the gas station isn't quite so bad just right now, as bad as it was. But overall, people aren't really seeing any kind of big changes in the things that they need to get through week to week and month to month.
Kyle Peterson: But to the point about President Biden, standing at the podium and trying to make the case that we've broken the back of this inflation. I mean, I was almost surprised that he wasn't taking credit for the passage of the Inflation Reduction Act, which went through the Senate over the weekend. And I know it still hasn't passed the House, but maybe the inflation just saw this bill coming and it got too scared. I mean, Allysia, it really does show the way that politicians try to surf these economic trends, and I mean, maybe this is a better analogy, get to the front of the parade. Because if this is the peak inflation number and we start seeing some moderation in coming months, I fully expect that President Biden and Democrats will say, "Look at this bill, the Inflation Reduction Act, it says it right in the title. And look, we've reduced inflation." And I just don't know that's actually going to be true, even though that's going to be the political argument that I expect.
Allysia Finley: And actually the other argument Biden is making is that his strategic petroleum reserve releases, which is about almost 1 million barrels per day, are really helping tame oil prices as well as his other regulatory actions, his threats to go after big oil and other big companies who are quote unquote price gouging. The reality is that those strategic petroleum releases are really a drop in the bucket, that the big contributor is just the slowing global economy and concerns that we could dip into a recession, if we aren't already there. China's lockdowns have really helped reduce global demand for energy in general and oil. And so Biden is basically, ironically, riding a wave into the recession, that anything has ... can take credit for this drop in inflation. It really is the slowing economy. Consumers, to some extent, may have less to spend because inflation has been so high. And so they're kind of scaling back and they're worried that the country is slouching toward a recession and that maybe jobs and employment could become more precarious. So if he wants to take credit for it, he also needs to take credit for an economic slowdown.
Kyle Peterson: But I think the example that Allysia brings up is a very good one. Remember months ago, President Biden was sending these letters to oil companies and he was pointing out that there was a gap between oil prices and gasoline prices and that it was larger than it had been in the past. It seemed to be growing. And haranguing them, saying it was their patriotic duty to do something about this, to lower gasoline prices. And that strikes me as the kind of thing that a politician does for a one purpose. And that's to build the political argument that they've done something that they can go show to their voters. And what we really have here is gas prices declining for totally unrelated reasons. I mean, maybe part of it is the recessionary worries that Allysia's talking about. People are buying fewer airplane tickets than they used to, they're tightening their budgets a bit. Maybe part of it is the end of the summer vacation, the summer driving season, but these broader trends. But again, I fully expect that President Biden, if we continue to see lower gas prices, is going to try to take credit for that.
Kimberley Strassel: Here's another reason he might have stood up at the podium too. In fact, it was to get the Inflation Reduction Act over the line. There had been some talk that if the CPI numbers came in this week and they were as bad as they had been last month or even worse, that it would've dramatically increased the pressure on House Democrats who are due to come back on Friday to maybe not vote for a bill that's going to wash yet more money into the economy and potentially worsen inflation. So in a way, you can say that these numbers were a slight bit of a reprieve and a boost to them for that vote on Friday in that the President and others will say, "Look, things are better. All the more reason for us to pass this bill, which will make it better still." I would note that they should probably be very careful for what they wish for. Because remember, one of the few good pieces of news in these CPI numbers were falling energy and gasoline prices. What does their Inflation Reduction Act actually do? It targets oil and gas and energy as part of their Clean Energy Initiative. So if anything, this bill could wreck some of the progress that we've seen for the reasons you guys have outlined as to why energy prices were coming down. This could actually get in the way of that continuing.
Kyle Peterson: Hang tight. We'll be right back. You're listening to Potomac Watch from The Wall Street Journal.
Announcer: From the Opinion pages of The Wall Street Journal, this is Potomac Watch.
Kyle Peterson: Welcome back. The other number that the Labor Department releases that is always worth looking at is earnings and wages and inflation adjusted. Hourly earnings are down 3% year-over-year. And that's combined with a drop of about a half a percent in the average work week. And you combine that and you get a real drop in average weekly earnings of 3.6% year-over-year. And that is why people are so upset about the economy, even though we have some reasonably good jobs numbers last month as President Biden brought up. But it suggests to me Allysia, that even if we get to peak inflation, even if we start seeing moderation from here on out, we still have a long ways to go before workers catch up to the living standards and the buying power that they had before this inflation set in, in the first place.
Allysia Finley: The issue here is that the wage increases people are getting are experiencing actually nominal, still healthy nominal wage increases, especially for those people who have been quitting their jobs. They've actually been experiencing the biggest increases, but those have been completely offset by the higher prices. I suspect that will continue. But the concern is that you alluded to, Kyle, is that these wage pressures could become entrenched in the economy and create a wage price spiral in which our workers demand higher wages to offset the effects of inflation. And those higher wages and the higher labor costs filter into business costs, and then they have to raise their prices. And therefore, again, you set off a wage price spiral that continues to fan inflation. This is what the economists and Federal Reserve worry about. And so the jury's still out about whether that is going to happen. We've seen signs of that in terms of some labor contracts that have been very generous. For instance, John Deere workers, in which they've received very healthy, shall we say, wage increases and increases into their 401k and other benefits. And so we may continue to see higher costs in terms of services and goods because of the workers are demanding higher wages to offset inflation.
Kyle Peterson: So where does this leave the Federal Reserve though, Kim? Because I get that President Biden is speaking to the public when he does stuff like this. But it seems to me that we've broken the back of inflation, we've conquered this mess, is not exactly the right message to be sending to the Federal Reserve right now, as it weighs in coming months, whether to keep raising interest rates or not.
Kimberley Strassel: Yeah. I doubt that the President's speech will factor into the Feds thinking about this, at least in the short term. I mean, the other pressure you'll see on the Fed though, too, is markets. They were very happy with the news today because in their minds, they are hopeful that it means that the Fed will let off the gas in terms of interest rate hikes, something the market always loves. But I would wager that the Fed understands this is one month that there is a lot of noise in these numbers. They're going to want to see a number of sequential changes going forward. And even then, they're going to be looking ahead because some of the indicators that come through are in fact lagging. So I wouldn't expect any change from them in the near term. They have had a very mixed message at times, going from very hawkish at moments, to very dovish at other moments. I guess we'll wait to see at the next meeting what they come up with. But in the meantime, one little interesting point, because we're talking about politics, we're only going to have two more of these CPI releases before voters go to the polls. So, time is growing short for there to become any clearer picture that will help one party or the other.
Kyle Peterson: Finally, we talked about Wisconsin's primaries yesterday, so let's do a bit of cleanup there. And the winner in the gubernatorial primary on the Republican side is Tim Michels, the owner of a big construction company. He defeated Rebecca Kleefisch, the former Lieutenant governor under Scott Walker, by about five percentage points, a pretty healthy margin. And here is Michels on election night.
Tim MIchels: I'd like to thank President Trump for his support, for his endorsement. It was a tremendous validation of our meteoric rise in this campaign. He knows that we need to have new leadership in Madison, and he sees a lot of similarities. He didn't have to run for president. I don't have to run for governor. He wanted to drain the swamp. We found out it's a really big swamp, and I know that Madison needs firm executive leadership. And that's what I'm going to do as governor.
Kyle Peterson: That is another notch for Trump's endorsement record, certainly. And overall, it seems to me that it's looking better in these primaries than it did a few months ago, particularly after Georgia, where governor Brian Kemp and Secretary of State Brad Raffensperger both steamrolled to victory. Trump is having better luck in recent weeks and recent months. I get that's a different state, different people on the ballot. But Allysia, as always, it is one thing to have a success in these Republican primaries. But the ultimate test is whether the candidates who get the nomination can go on in November to win the general election and appeal to independent, moderate, centrist voters to win the race.
Allysia Finley: My concern is that Wisconsin should be an eminently pick up governor seat. Tony Evers. And people in Wisconsin are generally not happy with his performance. They didn't like his lockdowns. So the Wisconsin Supreme Court ended up overruling those to some extent, but he really hasn't excited Democrats in Wisconsin and has really alienated and ticked off some moderate Republicans, especially those in the Milwaukee suburbs with school closures, and are just generally unhappy with the way things are going in Wisconsin. They were getting a little fatigued with Scott Walker and therefore ... And that probably contributed to Scott Walker's defeat in 2018, but they aren't exactly enthused with Evers Democratic leadership and his vetoes of Republican bills. And actually, what was interesting when you looked at the Wisconsin results was that Kleefisch did vary actually pretty strongly in the Milwaukee suburbs and up in Green Bay. And those areas are generally where you see more moderate Republican voters who are perhaps less culturally conservative. It's still very culturally conservative and Wisconsin is a generally more culturally conservative state, but not quite fertile Trump grounds as in the more rural areas of Wisconsin. But these are areas where you have a large population bases, a large electorates and where the races are actually going to be decided in November. They're the bellwethers and the swing counties. And so the fact that Michels didn't win and didn't do all that well in these, or didn't win in these areas, doesn't bode well for him or Republicans in November. And I think the hope is that he doesn't have a damaging down ballot effect that really crimps enthusiasm for Republican state legislatures or hurt Ron Johnson as well in November.
Kyle Peterson: One other result that caught my eye and recall last week that the speaker of the state House in Arizona, Rusty Bowers was defeated. And that was a piece of the Trump revenge tour, I believe. And he had testified before the January 6th committee, while the next stop on the revenge tour was intended to be the assembly speaker in Wisconsin, Robin Vos, who faced a Trump endorsed challenger. Adam Steen. Vos had drawn Trump's ire for refusing to try to de-certify the 2020 election. Here's a headline from Wisconsin media in July, meaning a month ago. It says, "Vos says former president Trump called him last week in another push to de-certify 2020 presidential results." When Vos declined that President Trump went on social media called him a professional RINO and so forth. But Vos has survived this challenge by a couple points, not very many votes. There's only about 10,000 votes in this state assembly race. And so the difference between him and the challenger, Adam Steen, was only about 250. But fascinating to see him survive when Rusty Bowers in Arizona did not. Kim, anything else that caught your eye on election night?
Kimberley Strassel: Yeah, one thing, because it goes to the division on the other side. And the news that I saw was that Ilhan Omar, who was obviously one of the members of the infamous squad, a very progressive accrue of Democrats in Washington. She's in Minnesota's fifth congressional district. She was running for her third term and she won her primary, but barely. It came down to a few thousand votes. And she had been challenged by Don Samuels, who's a moderate Democrat, a former Minneapolis city councilman. And he really went after Ilhan Omar's defund the police position. He was very pro-police. In fact, he and his wife actually successfully sued the city of Minneapolis to require it to increase its police staffing, to what is required under the city charter, which is I think 740 regular police staff. And this race really heated up and showed the divides in the party and show a certain degree to which even establishment Democrats are getting sick of the reputation these progressives are giving them. Mayor Jacob Frey came out and endorsed Don Samuels. A number of the building trades, unions came out, suburban mayors, all supported Samuels in the end. He had a super PAC who was putting a lot of money behind him. And again, this race she won, but not by much. And the supposition out there, is that results like this, coming by the way, also on primaries against other squad members like Cori Bush in Missouri and Rashida Tlaib in Michigan. They both won as well, but there's a supposition that this is going to encourage some more big challenges to the rest of progressive candidates in 2024.
Kyle Peterson: Thank you, Kim and Allysia. Thank you all for listening. You can email us at pwpodcast@wsj.com. If you like the show, please hit that subscribe button on your favorite podcast app. And we'll be back tomorrow with another addition of Potomac Watch.