This is not the end of inflation. It’s not even the beginning of the end. But maybe it’s the end of the beginning.
Last Wednesday, the US Bureau of Labor Statistics reported something we hadn’t seen since the depths of the pandemic recession: a month without inflation. Namely, the average price of the goods and services that consumers buy was not higher (in fact, it was slightly less) in July than in June.
Before I get to what the latest inflation figures mean, I will comment on two things about the reactions to the report.
First of all, there is absolutely no reason to doubt the figures. There were plenty of earlier indications that this report, and probably the next ones, would show a sharp drop in inflation. In fact, I wrote about this last week. It’s not just about falling gasoline prices; business surveys point to a decline in inflation, and supply chain problems are subsiding. Zero is slightly lower than most observers expected, but not by a huge amount.
Second, the Republicans’ angry reaction to the report came as a surprise, at least to me, not because it happened, but because of the form their outrage took. I expected impeach the Biden government to make up the accounts. Instead, much of the fuss seemed to indicate a lack of understanding of the difference between monthly and annual data.
When President Joe Biden accurately stated that we had zero inflation in July, many on the right accused him of lying, because prices in July 2022 were 8.5% higher than July 2021. Really? who don’t understand the difference? To be fair, sloppy business reporting may have contributed to their confusion: I saw plenty of headlines claiming “Inflation was 8.5% in July”. But the most essential point, surely, is that it is difficult to make people understand something when their slogans depend on their not understanding it.
Okay, but what about the background implications of the Big Zero?
Unfortunately, a month of zero inflation does not mean that the inflation problem is solved. Economists have long known that you get a much better read on core inflation if you strip out highly volatile prices — typically food and energy — but there are different measures of core inflation, and all of them remain unacceptably high. This is a clear indication that the economy is overheated. The Federal Reserve has been raising interest rates to cool things down, and nothing in Wednesday’s report should or will induce the Fed to change course.
However, the Fed could take solace in another report, released Monday: the New York Fed’s monthly survey of consumer expectations, which showed “a significant decline in short-, medium-, and long-term inflation expectations.” ”.
Since prices soared last year, Federal Reserve officials have been concerned that inflation will fester. What they mean is that businesses and consumers could come to believe that big price hikes are the new normal, which would perpetuate inflation, and that bringing inflation down again requires putting the economy into a serious and prolonged pothole. That’s what most economists think happened in the 1970s, and it’s not an experience anyone wants to repeat.
The good news is that there doesn’t seem to be any encystment. Public expectations about future inflation are falling, not rising; financial markets also seem to anticipate much lower inflation than we have seen over the past year.
Despite this good news, the Fed is likely to continue raising rates until it sees clear evidence that core inflation is coming down. But she has some leeway to be less aggressive than she could have been. Overall, falling inflation is unlikely to have much of an impact on economic policy. Instead, it could have big political implications.
Although Republicans foam at the mouth when it is pointed out to them, the truth is that Joe Biden has captained a huge jobs boom. But it hasn’t been given credit for that boom, possibly because many Americans don’t know it, but mostly because voters are focused on inflation, especially the fact that prices have risen faster than wages.
Now, at least that part of the story has been reversed. Wages continue to rise rapidly, which is one reason to think core inflation remains high. But, at least for now, inflation has slowed, so workers will see significant real wage increases. In fact, the real median wage increased by half a percentage point in July alone.
Hence the outrage of the Republicans with the July data: they were counting on high inflation, and in particular, high gasoline prices, would bring great gains to their party in the mid-term elections. Suddenly, however, economic events have a more liberal slant: gasoline falls and wages rise.
Will these facts make a difference for the November elections? I have no idea. But the current hysteria on the right shows that Republicans are worried about that possibility.
Paul Krugman He is a Nobel laureate in economics. © The New York Times, 2022. Translation of News Clips.
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