Opinion | Wonking Out: The Meaning of Falling Inflation

Inflation is going down, fast.

Gasoline prices, defying the predictions of a summer nightmare for motorists, lead the parade:

Most gas stations in the United States are already charging less than $4 per gallonand the drop in wholesale prices suggests that retail prices have yet to fall further.

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

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

All of this means that official data on consumer prices is almost certain to show much smaller increases in the coming months than the shocking numbers we have become accustomed to of late. But what will this improvement entail?

I’ll get to the implications for economic policy in a moment. But give me a minute to savor the political implications.

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

Did Donald Trump, who remains the dominant figure in the Republican Party, try to nullify a legitimate election? Gas is over $5 a gallon! Are Republican judges and state legislators taking away rights women have had for decades? Gas is $5 a gallon!

Now the party’s main electoral board, virtually its only electoral board, is being cut down at the base. I’ve been wondering what they’ll do. After spending many months doing everything they can to simplify the debate, Republicans will have a hard time suddenly turning to nuanced arguments about headline numbers versus core inflation.

So far, his main response appears to be to ignore slowing inflation and hope voters don’t notice. Here, for example, is Mehmed Ozrunning for senator from Pennsylvania on Thursday:

Has this man visited a gas station near his new jersey house lately?

When, I’m pretty sure it’s a “when,” not an “if,” official data also shows a sharp decline in inflation, I guess we’ll see denial supplemented with conspiracy theories: claims that the Biden administration is faking the numbers or in any way manipulate the commodity markets.

Should Democrats dwell on the good news about inflation and mock the doom of their opponents? Yes! Any Democratic politician who responds to falling energy and food prices with a speech about transitory versus core inflation should be in a different business.

However, policymakers, which in this case basically means the Federal Reserve, are in a different business, and they must respond to the good news of inflation by staying calm and carrying on.

Many fashionable economic concepts have failed the test of time, but the concept of core inflation (distinguishing between volatile prices, such as food and energy, and slower-moving prices that have a lot of inertia) has been very successful since the economist Robert Gordon It introduced it in the 1970s. Time and time again, the Fed has weathered crises by ignoring critics who wanted it to panic over irregularities in inflation caused by temporary jumps in commodity prices.

Now defining core inflation has become more difficult in the age of Covid, because the simple exclusion of food and energy seems inappropriate at a time when wild swings in things like used car prices and utility costs shipping have also caused fluctuations in the rate of inflation. At the moment, though, all the core inflation measures I know of, from traditional core to measures that exclude any large price changes and changes in labor costspoints to unacceptably high underlying inflation.

So why is inflation going down? Biden administration policy — releasing oil from the Strategic Petroleum Reserve, urging gas stations to broadcast declines in wholesale prices, efforts to untangle supply chains — may have contributed. But the main story is probably a global economic slowdown: the US is probably not in a recession, but Europe probably is, China is still hampered by its zero covid policy, etc.

All of which has very little to do with appropriate US policy. The Fed’s strategy is to reduce underlying inflation by using interest rate increases to cool the economy. Despite the friday heat labor market reportI have no doubt that this strategy will eventually work. But the good news we are about to receive on short-term inflation is not evidence that the strategy has already worked, and unfortunately (I am usually a currency pigeon), it does not provide justification for a swing towards a money. easier.

Does this mean that inflation is going to rise again? Not necessarily. The Fed’s efforts are likely to reduce core inflation over the next several months, so that when the transitory good news on gas prices wears off, it can be replaced by more permanent good news.

In any case, for the moment, inflation is heading lower, no doubt much to the dismay of politicians who were counting on gasoline prices to generate a red wave in November. Pass the popcorn.

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