In a tight presidential race in which Americans cite the state of the economy as the most important issue, one aspect of the country’s performance could prove decisive: How voters in battleground states currently perceive inflation.
Americans rank the economy and inflation as their top two issues in the November 5 election, according to CBS News and other polls. But perhaps even more important than current price levels is how voters in key states interpret their experience with inflation, according to Bernard Yaros, lead economist at Oxford Economics.
All eyes on Pennsylvania
Yaros notes that voters’ views on inflation are particularly important in Pennsylvania, a state experts say could be a tipping point in the contest between Vice President Kamala Harris and former President Donald Trump. Pennsylvanians appear to be more sensitive to inflation than people in many other states, with Yaros’ research finding that every 1 percentage point increase in inflation before a presidential election is linked to tens of thousands of Pennsylvanians voting against the incumbent and for the challenger.
That dynamic could be due to the state’s lower median annual household income of about $73,000, which is slightly below the U.S. median of $75,000. The Keystone State also tends to have an older population, at an average age of 41, compared with 39 years old for the U.S., Census data shows.
“Lower-income people devote more of their income to essentials — they will react more negatively” to inflation shocks, Yaros told CBS MoneyWatch. Pennsylvania “also has a slightly older demographic, so people on fixed incomes are going to feel the bite from high inflation.”
With new CBS News polling showing a statistical dead heat between Harris and Trump in Pennsylvania, the path to victory in the state may boil down to whether voters experience inflation in one of two ways, Yaros said.
Overall U.S. prices jumped 22% between January 2020 and September of this year, forcing consumers to shell out more for everything from groceries to car insurance. But in the past year, inflation has cooled to an annual rate of 2.4%, approaching the Federal Reserve’s target of 2%.
Given these trends, a key question that could tilt the balance in Pennsylvania, as well as in other battleground states, is whether local voters focus on the cumulative rise in prices since 2020 or instead take cheer from how inflation has cooled over the last year, Yaros said.
If voters fixate on how prices for many goods and services remain significantly higher than before the pandemic — what Yaros calls the “sticker-shock model” — Trump is forecast to win Pennsylvania by more than 90,000 votes, the economist’s analysis found. If, by contrast, voters zero in on the more recent descent in prices, Harris is projected to secure the state by 70,000 votes.
Why inflation leaves scars
Some battleground states have experienced a higher rate of inflation since 2020 than the nation more broadly, especially those in Sun Belt states like Arizona. While those areas are now seeing a step-down in prices, prices in the Middle Atlantic states, which includes Pennsylvania as well as New Jersey and New York, rose 3.4% last month — a full percentage point higher than the national rate, government data shows.
Yaros’ model shows that voters in other battleground states like Arizona, Georgia and Wisconsin — states won by Biden in 2020 — could also swing in favor of Trump if voters there view inflation through the sticker-shock model. Meanwhile, Americans typically dislike high inflation more than other economic shocks, such as rising unemployment, he said.
“You have a rich history of literature that shows people disliking inflation much more than they dislike other negative macroeconomic outcomes, such as higher unemployment,” Yaros said, pointing to a 1997 paper from Nobel-prize winning economist Robert J. Shiller.
He added, “Unemployment affects only a subset of the economy, but when you have periods of high inflation, that affects everyone.”
It’s difficult to predict which outlook will prevail in the battleground states, Yaros said. But, he added, “The research we’ve done, which has shown how lower-income folks have seen their share of spending toward discretionary spending permanently reduced because of the inflation shock, that would argue in favor of people fixating on the high price levels, still being upset with the political status quo.”
Inflation: How do you view it?
The Consumer Price Index measures the change in prices over time of a typical basket of goods and services. But many Americans tend to conflate inflation with the actual prices they’re paying at the store.
In other words, even though inflation has cooled, prices remain high; what’s more, they’ll stay high unless there’s a period of deflation, which typically only occurs when there’s a steep economic downturn. It also explains why more than 1 in 4 people polled by YouGov in August said they think the current inflation rate is over 10%, or more than quadruple the actual inflation rate.
“People who aren’t economists, when they think about inflation, are thinking about the price level,” Yaros said. “‘A gallon of milk is $3, not $2 like it used to be, and I’m upset about it’.”
Why the “misery index” could portend
Voters who focus on the recent cooler rate of inflation might be inclined to support Harris, in what Yaros calls his “misery-index model,” based on the misery index, an informal measure that looks at the sum of the nation’s unemployment rate and the annual inflation rate.
Currently, the misery index stands at 6.5%, below its 9.1% average since 1947.
Historically, the misery index has accurately predicted the presidential outcome, with a high index number predicting that the incumbent party was set to lose. For instance, the misery index reached 15% in 2020, indicating that President Trump was vulnerable in that year’s race.
To be sure, plenty of other factors could sway voters this year, from immigration to abortion, Yaros acknowledged. And despite Americans’ glum outlook about the economy, consumers are still spending.
“We’ve seen such a disconnect between consumer sentiment measures and actual consumer spending, so people could be saying one thing and acting differently,” he said. “I don’t think anyone can say for sure what way this is going to break.”