Opinion | Wonking Out: The Meaning of Falling Inflation

Inflation is falling, fast.

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

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

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

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 commodities are still rising, but at a slower pace than in many months:

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

I will come to the implications for economic policy shortly. 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, in particular, gas prices.

Did Donald Trump, who is still the dominant figure in the GOP, attempt to overturn a legitimate election? Gas is more than $ 5 a gallon! Are Republican judges and state lawmakers taking away the rights women have had for decades? Gas is $ 5 a gallon!

Now the party’s main electoral platform – practically their only electoral platform – is being sawed up at the base. I wondered what they will do. After spending many months doing everything they can to soften the debate, Republicans will find it difficult to suddenly orient themselves on nuanced issues about stock numbers versus underlying inflation.

So far, their main response seems to be to ignore the slowdown in inflation and hope voters don’t notice. Here, for example, is Mehmet Oz, running to become a Senator from Pennsylvania on Thursday:

Did this man recently visit a gas station near his home in New Jersey?

When – I’m pretty sure it’s a “when”, not an “if” – the official data also shows a steep drop in inflation, my guess is we’ll see denial supplemented by conspiracy theories. it is faking the numbers or manipulating the commodity markets in some way.

Should Democrats emphasize the good news about inflation and mock the judgment of their opponents? Yup! Any democratic politician who responds to falling energy and food prices with a speech on transient inflation relative to the underlying inflation would have to take on another business.

Politicians, however, who essentially mean the Federal Reserve in this case, I am in a different business, and they should respond to the good news about inflation by keeping calm and moving forward.

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

Now, defining core inflation has become more difficult in the Covid era, because the exclusion of food and energy alone seems inadequate at a time when wild swings in things like used car prices and shipping costs have also determined the fluctuations in the rate of inflation. At present, however, every measure of underlying inflation that I am aware of, from traditional core to measures that exclude large price changes and changes in labor costs, indicate unacceptably high underlying inflation.

So why is inflation going down? The policy of the Biden administration – the release of oil from the Strategic Petroleum Reserve, the incitement of gas stations to broadcast drops in wholesale prices, efforts to defuse supply chains – may have contributed. But the main story is probably a global economic slowdown: America probably isn’t in a recession, but Europe probably is, China remains limping from its zero-Covid policy, and so on.

All of this has very little to do with proper US policy. The Fed’s strategy is to reduce core inflation by using interest rate hikes to cool the economy. Despite Friday’s hot report on the job market, I have no doubt that this strategy will ultimately work. But the good news we’re about to receive about near-term inflation isn’t proof that the strategy has already worked, and alas (I’m usually a monetary dove), it offers no justification for a turn to easier money.

Does this mean that inflation is about to rise again? Not necessarily. The Fed’s efforts are likely to reduce underlying inflation in the coming months, so that when the transient good news on gas prices wears off, it could be replaced by more permanent good news.

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

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