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Some Good News on Inflation

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On Tuesday morning, the Labor Department released the latest Consumer Price Index, which showed inflation pressures easing slightly. On Wall Street, investors interpreted the new report to mean that the Federal Reserve is likely to adopt a less aggressive anti-inflation stance in the coming months: they pushed up stock prices and pushed down market interest rates. At the White House, President Biden said the report showed that his economic strategy was working, but he chose his words carefully. “Prices are still too high,” he said. “We have a lot more work to do, but things are getting better.”

That phrasing was smart. When Wall Street economists and ordinary Americans think about inflation, they tend to see things differently. To an economist, the inflation rate is the rate at which over-all prices are going up relative to a year ago. In June, this rate was 9.1 per cent; in November, according to the new C.P.I. report, it was 7.1 per cent. That’s a clear improvement. Moreover, this wasn’t a one-off: the inflation rate has been edging down for some time. During the first six months of this year, the average monthly increase in the C.P.I. was about 0.9 per cent. Since July, the monthly increase has been about 0.2 per cent. That’s long enough to constitute a trend.

Consumers, however, tend to think more in terms of price levels than rates of change, and they are particularly concerned about the prices of fixtures in the household budget, such as food, rent, and energy. When they go to the supermarket or convenience store and see the elevated price of a staple item—say, milk, selling for $3.99 a half gallon at my corner deli—they get sticker shock. Even if these high prices haven’t changed much in recent months, it’s little consolation. Consumers want to see prices coming back down, not merely levelling off.

The good news is that, in some areas of the economy, prices are falling back to more normal levels. According to A.A.A., the average price for a gallon of gasoline across the country is now three dollars and twenty-five cents. That’s down from a peak of more than five dollars in June—a price drop of more than a third. Moreover, and this hasn’t been widely discussed, gas prices are now slightly lower than they were a year ago.

According to the C.P.I. report, the cost of other energy sources, including kerosene and piped gas, also declined last month. More broadly, the prices of many manufactured goods fell—things like computers, televisions, photographic equipment, sewing machines, sports equipment, and window coverings. Since the start of the pandemic, a crisis in the global supply chain has driven up the prices of many imported goods. But, with supply-chain problems receding, and freight costs falling at a rapid rate, there is every reason to suppose that the prices of these goods will continue their downward trajectories. The trend may also spread to other areas, such as the auto industry, in which, for the past couple of years, manufacturers and dealers have pushed up prices sharply amid a shortage of supply. (Prices of used cars are already dropping, but prices of new vehicles were flat last month.)

Another reason for optimism is that housing costs, which make up about a third of the C.P.I., are starting to turn down. Private-sector surveys show that rents for new apartment leases have fallen for three months in a row. Because the Labor Department measures average rents over-all rather than just the cost of new rentals, this decline isn’t evident in the official data yet. To the contrary, the new C.P.I. report had the cost of shelter rising another 0.6 per cent last month, making it “by far the largest contributor to the monthly all items increase.” But, as we go through 2023, new rentals will start to be reflected in the official data, which should be another factor putting downward pressure on the over-all inflation rate. “The message here is clear; the month-to-month C.P.I. rent measure is volatile, but it is set to slow sharply over the next year,” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, noted.

The inflation news isn’t all reassuring. At 7.1 per cent, the headline rate is still far above the Fed’s target of two per cent, which means that Jerome Powell and his colleagues are virtually certain to raise the federal funds rate by another half percentage point on Wednesday. (They have already signalled this move.) And the prices of some individual items remain greatly elevated. The price of fuel oil went up 1.7 per cent in November; compared with twelve months earlier, it was up sixty-five per cent. The price of food—purchased at home and in restaurants—rose another 0.5 per cent. During the previous twelve months, it increased by more than ten per cent.

The recent rises in food prices came despite the fact that some key inputs to the food industry—including corn, wheat, and certain types of energy—have experienced substantial price drops in recent months. If these cost reductions aren’t soon reflected in supermarkets and takeout places, Americans will have good reason to be angry—and to suspect that big food companies are padding their profits at the expense of their customers. I doubt that the owner of my corner deli, who faces a lot of competition, is doing that. I’m pretty sure he’s merely passing along his increased costs. All the same, I’d be as relieved as anybody else to see the price of milk come down. But it’s also important to look at the over-all inflation picture, which is slowly but steadily improving. Rather than overcorrecting for its failure to predict the earlier price spike, the Fed should be mindful of this as it decides how to set policy in 2023. ♦

Source : The New Yorker

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