National average price of regular gasoline This Christmas is nearly 20 cents a gallon lower than a year earlier. Prices at the pump are still higher than during the pandemic recession, when an economic shutdown lowers world oil prices, but fuel affordability – as measured by ratio of average wages relative to gas prices – have almost returned to pre-Covid levels.
Now, the price of gas is not a good metric of economic health or successful economic policy – though if you’ve heard the Republican ad during the midterms, you might think otherwise. But falling prices at the pump are just one of many signs that the inflationary storm of 2021 to 2022 is easing. Remember the supply chain crisis, with shipping rates rising to many times the normal rate? It’s over.
More broadly, recent reports on inflation measures that the Federal Reserve typically uses to guide its interest rate policy have been really, really good.
So will this be the winter of our dwindling discontent?
After the nasty shocks of the past two years, no one wants to get too excited by the positive news. Having underestimated inflation risks myself in the past, I am trying to curb my enthusiasm and the Fed, which is worried about its credibility, is even more inclined to look for Dark clouds in silver lining. And those clouds are there, as I’ll explain later. It is too early to make a clear statement on inflation.
But there has been a major role reversal in the inflation debate. Last year, optimists like me tried to explain the bad news. Now the pessimists are trying to explain the good news.
What really stands out about the improvement in the inflation numbers is that so far, at least, it hasn’t followed the pessimists’ scenario. Many commentators insist that reducing inflation would require a prolonged period of high unemployment – say, at least a unemployment rate 5 percent in five years. And to be fair, this prediction could still be substantiated if recent anti-inflation progress turns out to be a false dawn. However, inflation has fallen rapidly, even as the unemployment rate remains near record lows.
What explains falling inflation? It now appears that most, if not all, of the massive inflationary wave reflects one-off events related to the pandemic and its aftermath – that’s what transition team (myself included) claimed it all, except that the transient effects were larger and more permanent than any of us imagined.
The first is supply chain issues. As consumers, fearing the risk of infection, have avoided face-to-face services — such as dining out — and purchased physical goods, the world faces a sudden shortage of shipping containers. Shipping, port capacity, etc. The prices of many goods have skyrocketed as the logistics of globalization turn out to be less powerful and flexible than we thought.
Then there was a spike in demand for housing, probably largely due to the pandemic surge work remotely. As a result, rents skyrocketed. Since official statistics use market rents to estimate the total cost of shelters, and shelters are a large part of measured inflation, this has driven inflation higher even as supply chain problems ease.
But new data from Cleveland Federal Reserve confirm what? private the firm told us for several months: Rapid rent increases for new tenants have stopped and rents may be falling. Because most renters have one-year leases, official measures of housing costs — and overall inflation figures do not take into account lag — yet to reflect this slowdown. But housing has gone from being a major driver of inflation into a stabilizing force.
So why shouldn’t we celebrate? You can look at the contents of the inflation numbers for bad omens, but I never believed that anyone, myself included, understood inflation well enough to do this usefully. . Essentially, as you exclude more and more items from your measure in search of “fundamental” inflation, what you’re left with becomes increasingly alien and unreliable.
Instead, my (and, I believe, the Fed’s) concerns stem from the fact that the job market is still very hot, with wages growing too fast consistent with an acceptable low inflation rate.
However, what I would like to point out is that the wages of many workers are like apartment rents, in the sense that they are reset only once a year, so the official figures on wages will be slower than with the market cooling down, and yes some evidence that the labor market is actually cooling. official report in January — especially in terms of job openings at the beginning of the month and employment costs at the end of the month — may (or may not) give us a better idea of whether this cooling is real or sufficient.
Oh, and with visible inflation slowing, the risk of a wage-price spiral, which I never thought was huge, is waning.
So we’ve got some encouraging inflation news. There’s still plenty of reason to worry and the news isn’t solid enough to justify breaking Champagne. But seasonally, I’ll enjoy at least an eggnog or two.
