Mark Weisbrot of CEPR had an article up in the November LA Times addressing Inflation and the Fed. It appears it may be reprinted in December’s LA Times. “Weisbrot (LA Times): Inflation is Falling Much Faster Than Most People Know; and The Fed’s Response to Inflation May Pose a Bigger Threat than the Inflation Itself.” An essay arrived in my Hotmail account just today. An interesting email which I will repeat many portions of it here.
Inflation Is Falling Much Faster than Most People Know – Center for Economic and Policy Research (cepr.net), Mark Weisbrot
The premise: “Do Americans understand what is happening with inflation in this country? This is an important question, because the public’s perception can influence national policy and political choices. Before the midterm elections one month ago, 87 percent of likely voters told pollsters that inflation was extremely or very important in deciding their vote.”
AB: To the question at hand, I would say no, they do not know and neither do they know why it it is happening besides what the news spout and politicians claim. A different phenomenon this go around.
Mark again; A simple example of what Americans see mostly in the news, and compare this with the data economists, and journalists who cover the US economy see.
November data for the Consumer Price Index (CPI-U) was released by the government showing a headline number of 7.1 percent. This was down from last month’s 7.7 percent. It still reflects a high rate of inflation for the United States. Bandied about by the news were phrases such as the “highest levels since the early 1980s” in the reporting for the last few months.
Mark: The numbers do not reflect the reality of what is occurring. The prices as measured by the (CPI-U) in November this year were 7.1 percent higher than a year earlier. Looking at the last five months reveals how much the numbers have decreased.
For these five months, annualized inflation has been just 2.5 percent. Just to be clear: that 2.5 percent is not the increase in prices over these five months (July through November). It’s the increase in prices that we would have if this inflation over five months continued for a year.
By contrast, annualized inflation for the five months prior to July (February through June) was 11.8 percent.
The Fed’s target has been 2 percent based upon a different measure of inflation than CPI. Typically, economists would not be worried about inflation of 2.5 percent. Some prominent economists would even target 3 percent as opposed to 2 percent.
There is a long list of facts and issues known to economists that have led many of us to less alarmist views than those of the wider public, including some politicians. For starters: the spike in inflation over the past 18 months was primarily a result of external shocks.
The war in Ukraine was one of those shock leading to spikes in oil to over $100/barrel when Russia attacked Ukraine. By March it was at $130/barrel. The only planned cure hold prices back was the Strategic Oil Reserve from which Biden released sweet oil for sours oil is exchange. The US had a greater capacity for refining sour oil. As its stands, the US will start to buy back oil to fill the SPR since oil has dropped to ~$60/barrel. And gasoline was at $5 to $6 a gallon.
I do not agree with Mark on gasoline pricing. Yes, it was high in California. Where I was in Arizona, we saw a high of $5.75. Now it is down near $3.00. People seem to think the US has control over this and the supply chain. We are far from having control over either. Biden did soften the issue and California has fallen from a record $6.49 per gallon in October to $4.61 this week.
Much of the issues with the economy was being driven by supply chain. The unloading of containers on the west coast, getting the containers off the docks, shortage of chassis to haul containers, train scheduling, etc. The same as 2008, we went through another chip shortage due to lack of orders, wafer growing closing, fab shutting down, and then startup. Plants did not maintain orders.
Even with two years of Covid, tens of millions of Americans are economically better off than they were before the change of government two years ago. Why is that? President Biden with fellow Democrats put money in the hands of people through various programs. He directed the lowering of the costs of the ACA for people <250% FPL, eliminated the ACA cliff for higher income, allowed subsidies up to 600% FPL. That has not been done since Roosevelt.
Wages for all production and nonsupervisory workers have risen at a 4.1 percent annualized rate.
There is a gross misunderstanding of inflation, economic supply chains, and the economy. The misunder-standing distorts American politics, influences people’s election decisions, and stymies the most important economic policy decisions our government makes politically.
The Federal Reserve itself has caused most of the US recessions since World War II by raising interest rates. It may well be on track to do so again in the coming months as we are up another 1/2 point. It it was not for labor shortage, the throwing of millions of people out of work would be a strong possibility. It could have serious political consequences.