As I think I noted earlier, I'll be heading back to Oregon for a family reunion tomorrow, so there probably won't be any posts until Tuesday, at the earliest. For that reason, I'll give you this one and then try to do a little more tonight, if possible. Here goes...

I do not purport to be an expert in Economics. Save for an intro macroecronomics class I took this last year to pad my schedule (I did get an A, at least) and my near-weekly reading of The Economist, I'm an amateur when it comes to economic analysis. Though my dad, who has his M.A. in Economics, might chide me for the following post that is bereft of scholarly understanding, I'm nevertheless going to attempt to look at the recent economic information as a Political Scientist (or at least as I think a Political Scientist would).

On Wednesday, the Federal Reserve raised the federal funds rate by a quarter of a point in an attempt to slow down the economy (and especially inflation). This action was expected for months, and because of this fact, primarily, the financial markets were largely unaffected. Some predict that the Fed will continue this relatively cautious course over its next few meetings--never raising the rate by more than a quarter point--thus leaving the rate at a historically low point for some time to come.

Here's the downside to this measured tactic, as noted by The Economist:

"One troubling recent sign came with the publication late last week of revised figures for American inflation and economic growth in the first quarter of 2004. The personal consumption expenditure deflator, a measure of inflation that is widely watched (and believed to be a favourite of Mr Greenspan's), rose by 2.0% at an annualised rate. GDP growth was revised down to 3.9%, from the previous estimate of 4.4%."

In other words, inflation is creeping in, even if only by a small margin.

Now for the political repercussions.

Although most data does not show widespread inflation, consumers (read: "voters") are beginning to feel the crunch as prices grow faster than their incomes. A glance at most major national news outlets will not allow the casual reader to find out about this troubling situation; however, you can be sure that local outlets are confirming the fears of inflation held their viewers, listeners and readers.

Take, for example, my hometown newspaper, The Oregonian. Save for Aaron Brown's "Morning Papers" segment, few people outside of the Pacific Northwest care about this paper. To local residents, though, it is a central source of news.

On March 16, The Oregonian featured a front page article entitled "Inflation Bite Worse Than Price Index Mark" on the impending problem of inflation. Stressing a local, rather than a national focus, the paper provided anecdotal evidence showing that prices were indeed growing at a quick rate.

'A gallon of regular gas costs 31 percent more than a year ago, for example. Tuition at an Oregon public college is up 9.9 percent and due for another 6.5 percent increase this fall. Homeowner's insurance premiums in the state have risen 9.3 percent since 2002.

And pizza, that most popular of American foods? Prices are on the rise there, too, thanks in part to an almost 90 percent increase in the cost of mozzarella.

"For the pizza industry, it's a killer," said David Rosenberg, vice president of Portland's 14-store Pizzicato Gourmet Pizza company. "Instead of spending $40,000 a month on mozzarella cheese, I'm spending $60,000."

[...]

To deal with the added costs, Rosenberg recently instituted a temporary "cheese surcharge" of 25 cents to 75 cents on every pizza he sells.'

Articles like these make the idea of inflation more accessible to the everyday public; this one particularly helped me see the effect inflation is having upon people's lives, especially on small businesses. While some professional economists would scoff at such unscholarly articles, they nonetheless affect normal citizens. If people begin to perceive inflation setting in, regardless of whether or not it actually is, their inflationary expectations will nonetheless adversely affect the economy. What is more, in politics, perceptions often count more than reality.

Continuing this small case-study on the economics of my state, most pundits label Oregon as one of the handful of "battleground states" in the upcoming election. Accordingly, it is very important for both the President and John Kerry to keep a close eye on the economic situation in the state. For this reason, Bush has sent the myriad of his economic advisors to the state to promote his economic credentials. Using these top-down tactics, the President believes he can change people's perceptions of the economy so he is not blamed for its problems.

I don't believe that this tactic will work, however. As with the comparision between national and local news outlets, people are going to be more likely to trust their pocketbooks and wallets rather than economic statistics and politicians when judging whether inflation is indeed becoming a problem. When consumers have to pay a 75 cent surcharge for cheese on their pizza, when they pay $30 instead of $23 to fill up their gas tanks, when they fork over $40,000 instead of $35,000 for a private college, they aren't going to care if Commerce Secretary Don Evans tells them everything is all right.

Come November, the economy will surely be doing better, and unemployment numbers will have fallen greatly. Even if the 1970s and 1990s taught us that there isn't always a tradeoff between unemployment and inflation, if the general rule holds (as it has recently and over time)--that inflation continues to grow rapidly as the jobless rate falls--the situation is not going to be good for any incumbent office holder, especially the President. There's little he or the Fed can do now that they've let the cat out of the bag save for extremely aggressive monetary and fiscal action to curb economic growth (which you're not going to see before the election). As long as stories like the one in The Oregonian keep popping up, its going to be a tough fall for the President (especially in my wonderful home state of Oregon), because in Presidential elections, it's the economy, stupid...