The economic news in last month’s PCE price index report, combined with this morning’s stunningly robust jobs report (gift link), is fantastic: “core” inflation continues to fall while the jobs market remains strong. This is super important — it defies the conventional wisdom that only a recession can “cure” or “tame” inflation. After all, Econ 101 taught us that prices go up when demand exceeds supply. So obviously we need to reduce demand to lower prices, right? Wrong! At least not in this particular case.
I’ve been worried that the Fed will provoke an unnecessary recession just in time for the 2024 campaigns. But this latest data all but proves that a recession will not be necessary to get inflation back to the Fed’s 2% target rate. The inflation of 2021 and 2022 has almost certainly been “transitory” after all, just with a longer transition period than we thought! Supply shortages during the initial pandemic recovery in 2021 pushed up prices for many products, and “cost-push” inflation in energy and food caused by Russia’s war on Ukraine caused another price surge in the first half of 2022. At the same time, quite a few service companies unaffected by shipping-related shortages and fuel costs still discovered they could push through at least temporary price hikes after the pandemic, due to a lack of competition. But now, labor is coming back, durable product prices are mostly declining, and service prices are mostly leveling off. Absent food and fuel at least, “core” price increases are steadily trending back toward the Fed’s 2% target, even without an increase in unemployment. More charts and data and cautions below the fold…
The big caveat is that fuel prices spiked in August, presumably due the the Russian/Saudi deal to cut production and exports this Summer. Food prices were up for the month as well, as were airline fares. Here is a chart that shows the full PCE price index, including food and energy. So while the economic news was good from this inflation report — core prices were well behaved — the political news was not so good: prices for gas and groceries went up in August. Likewise, the increase in fuel prices this Summer will pass through to costs of other product prices this Fall, although hopefully that will be temporary.
Here’s the fuller data table, showing the various components of the price data (click here for raw data). Note the “headline” rates of inflation are reported as price increases over the last 12 months. That’s why headline inflation rates are usually reported as between 3 and 4 percent currently. But reporting the most recent data as over the last 3 or 6 months is a lot more sensible and, well, “current.” I prefer the 3 month or quarterly rate, like what we use for GDP reporting. That best explains what has happened recently. Over the last three months, the “core” PCE index has risen at a 3.1% annual rate, and the full index (including food and energy) has increased at a 2.1% annual rate.
For more background from a a real expert, not just some anonymous blogger, here’s a gift link to Paul Krugman’s latest explainer on the Inflation/Interest Rates issue in the NYTimes: www.nytimes.com/… And here’s a gift link to a thoughtful discussion with Krugman and journalist Peter Coy on the inflation, interest rate, and recession outlook for 2024: www.nytimes.com/...