opinion | Wonking Out: the meaning of falling inflation

Inflation is falling – fast.

Gas prices, defying predictions of a nightmarish summer for motorists, lead the parade:

Most gas stations in the United States are already charging less than $4 a gallonand falling wholesale prices suggest that retail prices need to fall even further.

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

And company surveys point to a broader decline in inflation. For example, the Institute of Supply Management’s much-cited research among purchasing managers shows that commodity prices are still rising, but at a slower pace than in many months:

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

I will come later to the implications for economic policy. But give me a moment to enjoy 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.

Has Donald Trump, who is still the dominant figure in the GOP, tried to undo a legitimate election? Gasoline is over $5 a gallon! Are Republican judges and state legislators taking away the rights women had for decades? Gasoline is $5 a gallon!

Now the party’s main election board – virtually their only election board – is being sawed off at the grassroots level. I was wondering what they will do. After many months of doing what they could to silence the debate, Republicans will have a hard time suddenly turning to nuanced arguments about headlines versus underlying inflation.

So far, their main response seems to be to ignore the inflation slowdown and hope voters don’t notice. For example, here’s Mehmet Oz, who will become a Pennsylvania senator on Thursday:

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

When – I’m pretty sure this is a “when”, not an “if” – official data also shows a sharp decline in inflation, I suspect we’ll see denial supplemented by conspiracy theories: claims that the government- Biden is fake the numbers or somehow manipulate the commodity markets.

Should Democrats emphasize the good news about inflation and mock the doom-mongering of their opponents? Yes! Any Democratic politician responding to falling energy and food prices with a discourse on temporal versus underlying inflation should be a different company.

However, policymakers – in this case, in fact, the Federal Reserve – to be in another company, and they should respond to the good inflation news by staying calm and moving forward.

Many fashionable economic concepts have not stood the test of time, but the concept of core inflation — which distinguishes between volatile prices, such as food and energy, and slower-moving prices with a lot of sluggishness — has been very successful since the economist Robert Gordon introduced it. in the seventies. Time and again, the Fed has steered through crises by ignoring critics who wanted it to panic over inflation spikes caused by temporary rises in commodity prices.

Now defining core inflation has become more difficult in the Covid era, as just excluding food and energy seems inadequate at a time when wild swings in things like used car prices and shipping costs have also caused inflation rate swings. At the moment, however, every measure of underlying inflation I know of, from traditional core to measures that exclude large price changes and changes in labor costs, point to unacceptably high underlying inflation.

So why is inflation falling? Biden’s policies — releasing oil from the Strategic Petroleum Reserve, urging gas stations to pass on drops in wholesale prices, efforts to unravel supply chains — may have contributed. But the main story is probably a global economic slowdown: America is probably not in a recession, but Europe probably is, China remains hampered by its zero-covid policy and so on.

All of this has remarkably little impact on proper US policy. The Fed’s strategy is to lower underlying inflation by using rate hikes to cool the economy. Despite Friday’s hot labor market report, I have no doubt that this strategy will eventually work. But the good news we’re about to get about short-term inflation isn’t proof that the strategy has already worked, and unfortunately (I’m usually a monetary dove), it doesn’t justify a switch to easier money.

Does this mean that inflation will go up again right away? Not necessary. The Fed’s efforts are likely to bring underlying inflation down in the coming months, so that by the time the temporary good news about gas prices wears off, it could be replaced by more permanent good news.

At least for now, inflation is falling, no doubt much to the dismay of politicians who expected gas prices to trigger a red wave in November. Pass the popcorn.

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