Finally, some good news on inflation | Business

This is not the end of inflation. It’s not even the beginning of the end. But it may be the end of the beginning.

Last Wednesday, the US Bureau of Labor Statistics reported something we haven’t seen since the depths of the pandemic recession: a month without inflation. That is, the average price of goods and services purchased by consumers was not higher (in fact, it was slightly lower) in July than in June.

Before I get to what the latest inflation numbers mean, I’ll comment on a couple of things about the reaction to the report.

First of all, there is absolutely no reason to doubt the numbers. There were a lot of early indications that this report, and possibly the next, would show a sharp drop in inflation. In fact, I wrote about this last week. It’s not just about low gasoline prices; Business surveys show inflation is low, supply chain problems are easing. Zero is a little lower than most observers expected, but not by a huge amount.

Second, the Republicans’ angry reaction to the report came as a surprise, at least to me, not because it happened, but because of the form their anger took. I expected them to accuse the Biden administration of making up accounts. Instead, a lot of the fuss seemed to indicate a lack of understanding of the difference between monthly and yearly data.

When President Joe Biden accurately stated that we had zero inflation in July, many on the right accused him of lying, because prices in July 2022 were 8.5% higher than July 2021. Really? Who does not understand the difference? To be fair, the dirty business reports may have contributed to their confusion: I’ve seen a lot of headlines claiming “inflation was 8.5% in July”. But the most important point, for sure, is that it’s hard to get people to understand something when their slogans depend on them not understanding it.

OK, but what about the back effects of the big zero?

Unfortunately, a month of zero inflation does not mean that the inflation problem has been resolved. Economists have long known that you get a much better reading of core inflation if you exclude highly volatile prices – usually food and energy – but there are different measures of core inflation, all of which remain unacceptably high. This is a clear indication that the economy is overheating. The Fed has been raising interest rates to cool things off, and there’s nothing in Wednesday’s report that should or will urge the Fed to change course.

However, the Fed could find solace in another report released Monday: the New York Federal Reserve’s monthly survey of consumer expectations, which showed a “significant drop in inflation expectations in the short, medium and long term.”

Since prices rose last year, Federal Reserve officials have been concerned that inflation will worsen. What they mean is that businesses and consumers can believe that large price increases are the new normal, which will perpetuate inflation, and that lowering inflation again requires putting the economy in a dangerous, long-term hole. This is what most economists believe happened in the 1970s, and it’s not an experience anyone would want to repeat.

The good news is that there doesn’t seem to be any encryption. General expectations about future inflation are declining rather than rising; It appears that the financial markets are also expecting much lower inflation than what we have seen over the past year.

Despite this good news, the Fed is likely to continue raising interest rates until it sees clear evidence of lower core inflation. But it has some leeway to be less aggressive than it used to be. In general, the decline in inflation is unlikely to have a significant impact on economic policy. Instead, it could have major political repercussions.

Although Republicans spit out when they’re pointed at, the truth is that Joe Biden has made a huge career breakthrough. But it’s not given credit for that boom, perhaps because many Americans don’t know it, but mostly because voters focus on inflation, particularly the fact that prices rose faster than wages.

Now, at least that part of the story has been reversed. Wages continue to rise rapidly, which is one reason to believe that core inflation is still high. But, for now at least, inflation has slowed, so workers will see big real wage increases. In fact, average real wages rose by half a percentage point in July alone.

Hence the Republican anger over the July data: they were counting on higher inflation, and in particular higher gasoline prices, that would deliver big gains for their party in the midterm elections. But suddenly, economic events had a more liberal slant: lower gasoline and higher wages.

Will these facts make a difference in the November elections? I have no idea. But the current hysteria on the right shows that Republicans are worried about this possibility.

Paul Krugman He is a Nobel Prize winner in economics. © The New York Times, 2022. Translation of news clips.

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