opinion | Who is afraid of the CPI?

Three important inflation reports were released this week. The Federal Reserve Bank of New York on Monday released its latest report Survey of inflation expectations, which is very encouraging. On Wednesday, the Bureau of Labor Statistics released its latest report on Producer PricesWhich was somewhat reassuring. But the report in between – bad report on Tuesday Consumer prices – He got almost all the attention.

And look, I understand. After last month’s benign consumer price report, some people – including, it seems, a number of investors – began to hope for a fictional end to high inflation in 2021-22. This month’s report pretty much dashed those hopes (which, as it happens, I did not participate For a long time).

However, it is important to understand what the report did and did not show.

If you still thought we might be able to bring inflation down to an acceptable level without any pain — specifically, without a spike in the unemployment rate — Tuesday’s report made that belief more difficult to sustain than it already was. There will, unfortunately, be pain. But the report offered little indication, one way or another, of how much pain would be needed, or how long it should last.

Economists often discuss these issues in terms of what happens to core or “core” inflation, and then argue about the best measure of core inflation to use, to everyone’s surprise. So I was strongly influenced by an alternative formulation by the economist Joseph Politanowho suggests that we distinguish between a “clean purge” – a decrease in inflation that will happen more or less automatically as the recent turmoil of the pandemic, the Ukraine war, etc. Benefit.

And let’s not be sanitized here: it is very likely that intentional purging would involve lost functions. The purpose of raising Fed rates is to reduce public spending, which will surely lead to higher unemployment.

Now, clean cleansing is not a myth. It actually happened recently. overall consumer price inflation monthly basis It slowed sharply this summer, in large part due to the shift from rising gasoline prices to falling prices.

But a subtle look at the numbers shows that a clean disinfection will not be enough. I would like to believe otherwise; A year ago, I already thought inflation might pretty much cure itself. However, at this point, regardless of your preferred measure of core inflation – inflation that won’t go away on its own – it may be, it’s still very high, showing no visible sign of declining.

Although this revelation apparently shocked the financial markets, it shouldn’t come as a huge surprise. While interest rates have gone up a lot this year, they haven’t had much of an impact on the real economy so far. Not to mention the claims that we are in a recession; The fact is that unemployment is still close to a historical low, and other measures, such as the number of vacanciesThis indicates that the economy in general and the labor market in particular are still very hot. We will not reduce inflation to an acceptable rate until things calm down.

Since we haven’t seen any major easing yet, the latest numbers don’t tell us how painful the de-inflation process will be.

An optimistic scenario might look like this: an interest rate increase by the Fed raises the unemployment rate, but only to 4 percent, which is still very low by historical standards — enough to bring inflation down to 2 or 3 percent. . The odds of this scenario are improved by evidence — like the New York Fed report he cited — that 2022 isn’t the same as 1980. At the time, everyone expected high inflation to continue, so the economy had to be put on hold to pressure those expectations. Outside. Recent inflation expectations, especially over the medium term, have been low and low.

pessimists They argue, however, that the high rate of job vacancies means that controlling inflation requires much higher unemployment than in the past; And (for reasons that I don’t quite understand) they shy away from the good news about expectations. So they ended up saying that unemployment should go up much higher, maybe above 6 percent.

As you might imagine, I prefer the optimistic scenario. I take forecast data seriously, and see high vacancy rates, at least in part, as a temporary phenomenon in an economy still adjusting to the effects of the COVID-19 pandemic.

But the truth is that no one knows for sure, and the fact that a hot economy is still producing hot inflation does nothing to settle the controversy.

The good news, sort of, is that the Fed seems to know what it doesn’t. He talks very hard about inflation, because it has to maintain credibility, but he also talks about looking at “Total data received“which means it is ready to ease if and when inflation is clearly declining.

I think this moment will come sooner than many think. But we just have to wait and see.

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