Has US inflation gone down? Yeah.
We have two main measures of inflation: the consumer price index, which almost everyone knows, and the personal consumption expenditures index, which the Federal Reserve prefers as a guide to monetary policy; Explaining the differences between these measures would probably tell you more than you want to know. Anyway, the PCE currently looks more benign than the CPI, but both show that the rate of price increases over the past year was much slower than when inflation was at its peak in 2022.
It is true that there was a spike in reported inflation in the first months of 2024, but the most recent figures have convinced many observers, not to mention financial markets, that this was statistical noise. Inflation swaps, which effectively allow Wall Street to place bets on future inflation, implicitly project inflation of only 2.1% over the next year. And it’s really hard to deny that inflation is well below its peak.
However, many Americans do not believe that inflation has fallen, and there are several commentators with large audiences who insist that there has been no improvement.
So, Where does this denial of disinflation come from?
Some of us have seen this movie before. After the 2008 financial crisis, the Federal Reserve adopted “quantitative easing” (broadly speaking, printing a lot of money in an attempt to boost a weak economy) and there were many people who insisted that this would lead to inflation. galloping. When massive inflation did not materialize – when theoretical models that said money printing would not be inflationary in an economy with very low interest rates passed the reality test with flying colors – some people refused to accept what was. (or actually wasn’t) happening.
Instead, they became “inflation truth-tellers,” insisting that the benign figures were false.
Now the real inflationists are back. This time, however, they come in several variants. And I thought it would be helpful to break down each variant and explain how we know it’s wrong.
The first and most innocent version of disinflation denial (common among the general public and not especially related to partisanship) involves confusing the price level with inflation, the rate of change of prices.
Consider the price of food at home, i.e. groceries. Anyone who goes grocery shopping will tell you that things cost a lot more than they did a few years ago, and they’re right: Food prices have risen approximately 25% and, in general, they are not going down. But the rate at which they are increasing has fallen sharply, from double digits in 2022 to just over 1% recently. And this last figure is what economists refer to when they say that inflation has gone down.
Now, I imagine a lot of people wish prices would go back to what they were at the beginning of 2020. In fact, trying to do so would be a very bad idea. Still, this is a fairly innocent source of confusion.
Less innocent is the widespread urban legend that official inflation measures leave out essential goods, including food and gasoline, and therefore do not reflect the true cost of living. I see this caption in my email all the time.
Where did this idea come from? When the government estimates real wages, defines poverty in a given year, or sets cost-of-living increases for Social Security, it always uses the entire consumer price index, excluding nothing. But for analytical and policy purposes (when trying to determine, for example, in which direction interest rates should move), economists often consider “core” inflation, which effectively excludes food and energy prices.
The origins of this practice date back to a 1975 article by economist Robert Gordon, who argued that it was useful to distinguish between temporary price rises caused by shocks such as disruptions in global oil markets and “hard” inflation that was rooted in the oil sector. economy and it would be difficult to go down again. Somewhere along the way, the “hard” part fell out of the jargon and it became standard practice to estimate core inflation excluding food and energy.
This was a reasonable approach at the time, although in an economy disrupted by the aftermath of the coronavirus pandemic. COVID-19 there were probably a lot more transient things than usual. In particular, the sudden rise in working from home caused a huge, but temporary, increase in rental rates for new apartments.
Since the Bureau of Labor Statistics estimates housing prices (which are a large part of the CPI) using rents (including an imputation of the rental price of an owner-occupied home), and since housing is a large part of measured inflation, this in itself suggests that traditional core inflation does not exclude enough. And there is an additional problem, and that is that because most tenants have leases, average rents (which are what enter the CPI) are far behind the new rental rates.
Therefore, there are good reasons to go beyond traditional core inflation. But there are two big problems with doing that. One is that the more things are excluded from the inflation measure, the more what is left is dominated by problematic issues such as the price of financial services. The other is that changing measurements mid-stream runs the risk of motivated reasoning, choosing the measurement that tells the story you want to hear.
These days I’m kind of a fan of “multivariate core trend inflation” (try saying that five times fast) which uses a statistical algorithm to produce a more flexible measure of underlying inflation and is less subject to motivated reasoning because it’s untouched. by human hands.
That measure, followed by the New York Federal Reserve, shows two key trends. First, core inflation is very low. Second, on an annual basis, underlying measures and simple inflation are more or less the same. So no, official estimates do not minimize real inflation.
Finally, at the lowest rung of inflation veracity are conspiracy theories, claims that the deep state is simply fudging the numbers. For example, there has recently been wide spread on social media of the false claim that the Bureau of Labor Statistics has removed coffee from the Consumer Price Index to make President Joe Biden look better.
One answer to this type of thing is to look at how much detail the office provides. Falsifying these figures would require the agency to be corrupt from top to bottom, which it is not. Beyond this, we have many independent indicators of what is happening with inflation, and they all more or less match the official figures. Let me give just two examples.
Purchasing manager surveys, such as the one conducted by S&P Global, typically ask companies whether their costs have increased or decreased over the past month. Historically, the percentage saying costs have increased has been closely correlated with the inflation rate. That S&P Global index, known as the US services PMI, tells the same story about falling inflation as official federal data.
Another example: The Atlanta Fed periodically surveys businesses and asks them how much their costs have increased over the past year and how much they expect them to increase in the next year. According to this retrospective measure, the so-called increase in unit costs, inflation is very low, and expected inflation is even lower, just 2.3%.
And there is much more. Fewer and fewer small businesses are raising prices, according to a report from the National Federation of Independent Businesses. Companies mention inflation much less in earnings calls, FactSet has observed. Etc.
There is a legitimate argument about how far we are from the Federal Reserve’s official 2% inflation target and how difficult it will be to reach it (or whether we should at all). But if you insist that inflation hasn’t gone down much, the problem isn’t the economy; it’s you.
© The New York Times 2024
