Reviews | Wonking Out: The Meaning of Falling Inflation

Inflation is down – fast.

Gasoline prices, defying predictions of a nightmarish summer for motorists, are leading the parade:

The majority of gas stations in the United States are already charging less than $4 per gallonand falling wholesale prices suggest that retail prices need to come down further.

Food prices are also falling. Here is the wheat futures price:

And business surveys suggest a broader decline in inflation. For example, the widely cited Institute of Supply Management survey of purchasing managers shows that prices paid for raw materials continue to rise, but at a slower rate than they have for many years. many months:

All of this means that official consumer price data will almost certainly show much smaller increases over the next few months than the shocking numbers we’ve grown accustomed to of late. But what will this improvement mean?

I will discuss the implications for economic policy in a few moments. But give me a minute to savor the political implications.

Republican efforts to regain control of Congress have relied almost entirely on blaming Joe Biden for inflation — and gas prices in particular.

Did Donald Trump, who is still the dominant figure in the GOP, try to overturn a legitimate election? Gas costs over $5 a gallon! Have Republican judges and state legislators disenfranchised women for decades? Gas is $5 a gallon!

Now the party’s main electoral board – pretty much its only electoral board – is sawed off at the base. I wonder what they will do. After spending many months doing everything they can to deaden the debate, Republicans will be hard pressed to suddenly switch to nuanced arguments about headline numbers versus underlying inflation.

So far, their main response seems to be to ignore slowing inflation and hope voters don’t notice. Here, for example, is Mehmet Oz, running for senator from Pennsylvania on Thursday:

Has this man recently visited a gas station near his home in New Jersey?

When – I’m pretty sure that’s a ‘when’, not an ‘if’ – the official data also shows a sharp drop in inflation, I guess we’ll see denial supplemented by conspiracy theories: claims that the Biden administration is faking the numbers or somehow manipulating commodity markets.

Should the Democrats emphasize the good news about inflation and scoff at the catastrophizing of their opponents? Yes! Any Democratic politician who reacts to falling energy and food prices with talk about transient inflation versus core inflation should be in a different business.

Policymakers, however – which in this case essentially means the Federal Reserve – are in a different business, and they should react to good inflation news by keeping calm and carrying on.

Many fashionable economic concepts have failed the test of time, but the concept of underlying inflation – which distinguishes between volatile prices, such as food and energy, and slower prices that have a lot of inertia – has been very successful since economist Robert Gordon introduced it in the 1970s. inflation caused by temporary jumps in commodity prices.

Now defining core inflation has become more difficult in the age of Covid, as simply excluding food and energy seems inadequate at a time when wild swings in things like car prices d occasion and shipping costs also caused fluctuations in the rate of inflation. Right now, however, every measure of underlying inflation that I know of, from the traditional core to measures that exclude any major changes in prices and labor costs, points to unacceptable underlying inflation. .

So why is inflation falling? Biden administration policy — releasing oil from the Strategic Petroleum Reserve, urging gas stations to pass on lower wholesale prices, efforts to untie supply chains — may have helped. But the main story is probably a global economic downturn: America probably isn’t in a recession, but Europe probably is, China remains hobbled by its zero-Covid policy and so on.

All of this has remarkably little bearing on proper American policy. The Fed’s strategy is to drive down core inflation by using interest rate hikes to cool the economy. Despite Friday’s labor market report, I have no doubt that this strategy will eventually work. But the good news we’re about to get on near-term inflation isn’t proof that the strategy has ever worked, and alas (I’m usually a monetary dove) it offers no justification. for an easier pivot to money.

Does this mean that inflation will pick up again? Not necessarily. The Fed’s efforts are likely to push core inflation down over the next few months, so as the transitory good news for gasoline prices fades, it may be replaced by more positive news. permanent.

In any case, for now, inflation is down, no doubt much to the dismay of politicians who were counting on the price of gasoline to deliver a red wave in November. Pass the popcorn.