The latest numbers on consumer prices arrived Wednesday, and they were better than even optimists had expected.
Which is not to say that everyone was happy. Republicans are more or less in denial, no doubt worried that they may be losing pretty much their only substantive campaign issue — leaving them with nothing to run on besides wokeness and Hunter Biden. And there have been some fairly peevish reactions from economists who had committed themselves to the grim view that we would face a nasty “sacrifice ratio” — that controlling inflation would require years of high unemployment.
For this report was anything but grim. It strongly suggested that we may be heading for a soft landing — a return to acceptable inflation without a large rise in unemployment.
To understand what the report told us, you first need to know that few serious analysts paid much attention to the two numbers that dominated most news reports: overall inflation and “core” inflation, excluding food and energy, over the past year.
Overall inflation has been driven largely by clearly temporary swings in volatile prices: The 16.5% decline in energy prices over the past year isn’t going to be repeated.
Core inflation, on the other hand, is at this point dominated by official shelter prices, which lag behind market rents by a year or more. So the core number is still reflecting the big 2021-22 run-up in rents, itself probably driven by the rise in remote work rather than what’s happening to the economy now.
So most of us now look at measures that try to bypass these distortions. I’m a fan of “supercore,” core inflation excluding shelter and used cars. Others prefer different measures, but they’re all telling the same story: a rapid decline in underlying inflation, even though the unemployment rate is the same as it was a year ago.
Supercore inflation, for example, was 3.5% over the past year, 2.7% at an annual rate over the past six months and 1.1% over the past three months. Even I don’t believe that three-month figure, which was probably depressed by statistical noise, but the six-month number is down from 6.8% a year ago — and it’s not far from the Federal Reserve’s target of 2%.
Why have things gone so well? Part of the answer is probably that until recently, disruptions related to the pandemic were still driving some inflation, but those disruptions have been fading away. Part of the answer may also be that when the economy is running hot, policies that cool it down — such as the Fed’s recent rate hikes — may reduce inflation without much adverse effect on employment.
What can still go wrong?
First, this might be a statistical head fake; noisy data might be making things look better than they are, or future data revisions may take away some of the good news.
Second, most estimates of underlying inflation are still running significantly above the Fed’s target, and some economists argue that squeezing out that last bit will be painful.
Finally, we might get a recession even if we don’t need one to control inflation. Monetary policy often works with a lag, so there might, to mix metaphors, still be a recession in the pipeline.
So we haven’t touched down on the runway yet, and a soft landing isn’t guaranteed. But it looks amazingly within reach.
And if we do get that soft landing, I hope we’ll see some re-evaluation of economic policy over the past years. Both the Biden administration and the Fed have been the targets of harsh criticism for initially missing the risk that engaging in large federal spending while keeping interest rates low would lead to inflation. But they have presided over a remarkable burst of job creation.
The 2021-22 burst of inflation was a shock, but if it turns out to have been temporary and ends without major suffering, it will be hard to avoid the conclusion that recent economic policy has, all things considered, been pretty darn good.
The New York Times