ROI-'True cost of living' could be Trump's biggest headache: Mike Dolan

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Mike Dolan

LONDON, May 21 (Reuters) - For most households, the cost of money is part of the cost of living. If borrowing costs rise again to choke off inflation, the political fallout could rival the cost-of-living backlash that dogged Democrats in the 2024 election.

For a variety of reasons, U.S. President Donald Trump has repeatedly demanded lower interest rates throughout his first and now second terms in office. The mood of the electorate is no doubt one of them.

But his Iran war and related energy shock have pushed annual inflation back above 4% this month, in all likelihood, and gas pump prices are more than 40% higher than a year ago. That mood has already soured.

The University of Michigan's monthly consumer survey showed its main sentiment reading plunging to a record low in May, lower than at any point in a series dating back to 1960.

Public opinion polling shows a similar picture, even among Republican voters.

Only 47% of Republicans give Trump a thumbs up on the cost of living, according to the latest Reuters/Ipsos poll, compared with 46% who say he's doing a bad job. Among Americans overall, just one in five approve of Trump's record on the cost of living.

This throws a spotlight onto Trump's apparent softening on interest-rate cuts this week, just as his appointee, Kevin Warsh, takes the helm of the Federal Reserve.

In stark contrast to the past year, when he regularly lambasted outgoing Chair Jerome Powell for not cutting rates, Trump told the Washington Examiner on Tuesday that Warsh can do what he wants on interest rates.

As so often with Trump, that may have been a throwaway line.

But it may also reflect an acknowledgement that Warsh could have to preside over Fed action to rein in reheating inflation, most likely by holding off on further rate cuts or, if futures markets are to be believed, raising rates by year-end.

A White House calculation may be that the public needs some reassurance the Fed will be allowed to do its job.

But therein lies a worrying juncture that Trump's predecessor Joe Biden and Democratic candidate Kamala Harris faced in the run-up to the 2024 election.

Despite a rebounding economy and stock market, retreating inflation and low unemployment, consumer sentiment and the administration's approval ratings sagged badly into the election, and the "cost of living" remained top of the list of voter gripes.

HIT BY DISEASE AND CURE

Two economic reasons were regularly cited.

The first was that even though the rate of inflation had halved from the 2022 peaks by the election, the cumulative rise in prices over the four years still rankled with households whose wage gains hadn't quite kept up.

Whatever the rate of price rises, consumer price indexes rose 17% over Biden's term. They've risen a further 4% since Trump returned.

The second was that the true cost of living encompasses, in most people's eyes, higher borrowing costs - the Fed's remedy to control wider price inflation.

A 2024 paper by economists Larry Summers, Marijn Bolhuis and Judd Cramer detailed how this "true cost of living" has shaped household sentiment over the years. It complicates any assessment of voter pain by capturing both the inflation disease and the interest-rate cure.

"For consumers, the cost of money is part of the cost of living," they wrote.

Their "alternative" cost-of-living measure, which includes new home loans, auto financing and credit card borrowing costs, jumped 14% in 2023, even though consumer price indexes rose just over 4%.

This year, Treasury borrowing rates have jumped as inflation has risen and markets have reconsidered whether the Fed may be forced to raise policy rates. That has lifted consumer borrowing costs more broadly.

Even though Fed rates have come well off 2024 highs, average credit card, auto loan and fixed-rate mortgage costs are still over 50% higher than they were before the COVID-19 pandemic.

Add the benchmark 10-year Treasury borrowing rate to the so-called Misery Index, which combines inflation and unemployment, and the gauge is now at its highest since February 2023.

The Fed may feel it needs to act now to rein in inflation expectations and recapture credibility in meeting a 2% target that it's missed for years. Markets clearly see the logic and the risk, even if not everyone agrees.

But in doing what policymakers think is the right thing, the political fallout among Americans could be compounded even if Fed tightening eventually reins in inflation.

In some respects, Trump may be damned if he supports that and damned if he doesn't. Supporting late but severe Fed action to control inflation in 2022 and 2023 certainly didn't help Biden's approval rating very much, but it's anyone's guess where the inflation rate would have settled if the Fed hadn't acted.

For Trump, the temptation to revert to using the Fed as a scapegoat for public disaffection with the economy may just be too great in the end.

(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and X. And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a week.

(by Mike Dolan; Editing by Marguerita Choy)