opinion | Woking Out: The Meaning of Falling Inflation

Inflation is coming down – fast.

Gas prices, a. defying the predictions of nightmare heat For motorists, the parade is led by:

Most Gas Stations in the United States Are Already Charging less than $4 per gallonAnd the fall in wholesale prices suggests that retail prices are yet to fall further.

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

And trade surveys are suggesting a broader decline in inflation. For example, the widely cited Supply Management Institute Surveys of purchasing managers show that the prices paid for raw materials are still rising, but at a slower rate than in several months:

All this means that official data on consumer prices will almost certainly show little growth over the next few months compared to the startling numbers we have become accustomed to recently. But what would this reform mean?

I will understand the implications of economic policy shortly. But give me a minute to taste the political implications.

Republican efforts to gain control of Congress have almost entirely blamed Joe Biden for inflation — and gas prices in particular.

Did Donald Trump, who is still the dominant figure in the GOP, attempt to reverse a legitimate election? Gas is over $5 per gallon! Are Republican judges and state legislators taking away women’s rights for decades? Gas is $5 per gallon!

Now the party’s main election issue – to a large extent their only election issue – is being looked upon on Aadhaar. I was wondering what they would do. After spending several months doing everything possible to quell the debate, Republicans will suddenly have a hard time turning to the finer arguments about headline numbers versus underlying inflation.

So far, their main response is to ignore the slowdown in inflation and hope that voters will not notice. Here, for example, is Mehmet OzuRunning to be Pennsylvania senator on Thursday:

Has this guy visited any gas stations near him? New Jersey Home lately?

When – I’m pretty sure it’s “when,” not “if” – official data also shows a sharp drop in inflation, I guess we’ll see a denial complemented by conspiracy theories: claims the Biden administration is fake numbers or Manipulating commodity markets in some way.

Should Democrats insist on the good news over inflation and scoff at the doom of their opponents? Yes! Any Democratic politician who responds to declining energy and food prices with a discourse about temporary versus underlying inflation should be in a different business.

Policymakers, however – which in this case basically means the Federal Reserve – Huh In a different business, and they should respond to the inflation good news by keeping calm and moving forward.

Many fashionable economic concepts have withstood the test of time, but the basic inflationary concept—distinguishing between too much inertia in volatile prices, such as food and energy, and slow-moving prices—has been highly successful since The Economist. robert gordon It was introduced in the 1970s. Time and again, the Fed has steered through crises by ignoring critics who wanted it to panic over blips in inflation caused by a temporary jump in commodity prices.

Now, defining core inflation has become difficult in the post-Covid era, as 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 to fluctuate. Inspired to climb. At this time, however, every measure of underlying inflation I know of, ranging from the traditional basic measures which excludes any major price changes and change in labor costPoints 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 pass on the drop in wholesale prices, may have contributed to efforts to untangle supply chains. But the main story is the potential for a global economic slowdown: the US might not be in recession, but Europe probably is, China upset with its zero-Covid policy and so on.

All of which has remarkably little effect on appropriate US policy. The Fed’s strategy is to bring down underlying inflation by using interest rate hikes to cool the economy. Despite Friday’s heat 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 alas (I’m generally a monetary pigeon), it’s not a pivot toward easy money. does not provide any justification for it.

Does this mean that inflation is going to come back up again? Not necessarily. The Fed’s efforts will likely bring down underlying inflation over the next few months, so that by the time the momentary good news from gas prices wears off, it could be replaced by more permanent good news.

In any case, for the time being, inflation is going down, undoubtedly a great disappointment for politicians who were counting on gas prices to deliver a red wave in November. Pass the popcorn.

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