Opinion | Wonking Out: The Meaning of Falling Inflation

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Inflation is falling – fast.

Natural gas prices, defying expectations nightmarish summer For motorists, leading the parade:

Most U.S. gas stations are already charging Less than $4 per gallonwhile the decline in wholesale prices suggests that retail prices have further room to fall.

Food prices are also falling. Here are the futures prices for wheat:

Business surveys pointed to a broader decline in inflation.For example, the widely cited School of Supply Management The survey of purchasing managers shows that prices paid for raw materials are still rising, but at a slower pace than in the past few months:

All of this means that official consumer price data in the coming months will almost certainly show a much smaller increase than the shocking numbers we’ve become accustomed to these days. But what does this improvement mean?

I’ll talk about the implications for economic policy later. But please give me a moment to savor the political implications.

GOP efforts to regain control of Congress depend almost entirely on blaming Joe Biden for inflation, especially gasoline prices.

Is Donald Trump, still the dominant figure in the GOP, trying to overturn a legitimate election? Gasoline is over $5 a gallon! Are Republican judges and state lawmakers taking away the rights women have enjoyed for decades? Gasoline is $5 a gallon!

Now, the party’s main electoral sector — pretty much their only one — is being sawed off at the grassroots. I’ve been wondering what they’re going to do. After spending months doing everything they can to quell the debate, it will be hard for Republicans to suddenly turn to a nuanced debate about headline numbers versus underlying inflation.

So far, their main response appears to be to ignore the slowdown in inflation and hope voters don’t. For example, here is Mehmet Oz, who ran for Pennsylvania Senate on Thursday:

Has this guy ever been to a gas station near him? New Jersey home recent?

When – I’m pretty sure that was “when”, not “if” – official data also shows a sharp drop in inflation, and I guess we’ll see conspiracy theories supplemented with denials: claims that a Biden administration is a fake number or something Manipulate commodity markets in a way.

Should Democrats highlight the good news about inflation and ridicule their opponents for their doomsday? Yes! Any Democratic politician responding to falling energy and food prices will talk about temporary inflation versus potential inflation, and he should be in a different business.

However, policymakers — basically the Fed in this case — Yes In a different business, they should deal with the good news of inflation by staying calm and continuing.

Many trendy economic concepts have not stood the test of time, but the concept of core inflation—which distinguishes between volatile prices, such as food and energy, and slow-moving ones with a lot of inertia—has been remarkably successful since economists. Robert Gordon Launched in the 1970s. Time and again, the Fed has weathered crises by ignoring critics who want the central bank to panic about inflationary swings caused by a temporary rise in commodity prices.

Now, in the age of Covid, defining core inflation has become even more difficult, as excluding food and energy doesn’t seem to be enough at a time when wild swings like used car prices and transportation costs are also driving inflation swings.At the moment, however, every measure of underlying inflation I know of, ranging from traditional core inflation to measure does not include any major price changes and Changes in labor costsindicating that the underlying inflation rate is unacceptably high.

So why is inflation falling? The Biden administration’s policies — releasing oil from the Strategic Petroleum Reserve, urging gas stations to pass on falling wholesale prices, and efforts to disrupt supply chains — may have played a role. But the main story may be a global slowdown: the US may not be in recession, but Europe may be, China is still weighed down by its zero-coronavirus policy, and so on.

All of this has little impact on appropriate U.S. policy. The Fed’s strategy is to lower underlying inflation by raising interest rates to cool the economy. Despite Friday’s red-hot labor market report, I have no doubt that this strategy will ultimately work. But the good news we’re about to get about short-term inflation doesn’t prove the strategy has worked, and alas (I’m usually a currency dovish), it doesn’t provide a reason for a move to easier money.

Does this mean inflation will rebound again? unnecessary. The Fed’s efforts are likely to reduce underlying inflation in the coming months, so when short-lived good news from natural gas prices fades, it may be replaced by more lasting good news.

For now, however, inflation is falling, no doubt much to the dismay of politicians who were counting on gasoline prices to set off a red wave in November. Pass the popcorn over.

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