Throughout the second half of 2022, U.S. price increases have been fairly tame. In November, the comprehensive Price Index for Personal Consumption Expenditures increased by a meager 0.1%. The PCE index excluding Food and Energy increased by only 0.2%. Multiply those monthly increase rates by 12, and, based on recent months at least, the annual inflation rate would already be pretty close to the Fed’s target of 2% annual inflation. Here’s a link to the raw source data I use, which was released today.
So why is the Fed seemingly determined to raise unemployment to fight inflation? I blame Larry Summers. Whether for sincere or attention-seeking purposes, I think Prof. Summers has been putting out a faulty inflation narrative. Our post-pandemic inflation is mostly still related to supply disruptions — including, and perhaps especially, labor supply — and to Putin’s war, not to overmuch demand from too much pandemic relief. I believe our inflation is mostly transitory, like we had after World War II, not lasting and self-perpetuating, like we had in the 1970s. I think Larry just got this one wrong — blaming demand instead of supply — and he’s providing liberal cover for false Republican narratives.
Of course, Dr. Summers is an eminent economist and policymaker, and I’m just an anonymous semi-retired economist whose career was distinguished mostly by a lack of ambition and a love of bike riding, not academic rigor. But still, I’m right about this one.
And to be fair, Summers is starting to backtrack. His latest pontificate in the Washington Post does seem to suggest that the Fed should start to back off. He mentions that used car prices are declining (actually prices for pretty much all hard good are declining).
Here are some of his direct quotes, whose proper interpretation is “Gosh, maybe I was too strident earlier, now the Fed should be more careful than I was:”
“Hawks who suggest the Fed must keep raising rates until they substantially exceed past inflation neglect the fact that inflation is coming down — much less the possibility that the economy could face a Wile E. Coyote moment in 2023, in which demand collapses.”
He goes on:
“This could occur as small and medium businesses hit a wall of high-interest refinancing, as markets suddenly focus on what a recession would do to corporate profits, as consumers’ covid-era savings are depleted, or as businesses that have been clinging to their workforces realize they’re no longer necessary.”
Well yeah. That is exactly what we inflation “doves” are worried about.
Summers notes that “inflation is coming down” and that “inflationary expectations are low.” He never makes a case for why this covid-era inflation could become self-sustaining, instead of temporary. He derides inflation doves as “silly”, saying:
Doves are wrong to argue that the Fed should obviously pause in raising rates since inflation expectations are low.
Why are we wrong about that? He never says. I guess it’s self-evident somehow, but I don’t see it.
Over the last several months here at Daily Kos, we’ve been noting the low monthly and quarterly inflation figures, at least since the price spikes caused in the first half of the year by the invasion of Ukraine. For example, here, here, here, here and here. Long-term interest rates for Treasury bonds remain well below 4%, signaling that Wall Street doesn’t think inflation is a long-term problem. “Core” inflation, subtracting food and energy, is also trending down over the last couple months.
Source: www.bea.gov, calculations by the author.
It’s time to change the narrative. We need to fight the economic challenges of the future, not the past. President Biden’s economic package of generous one-time pandemic relief followed by infrastructure and climate funding, and high military spending to fight global fascism, is largely future-facing and correct in my opinion.
Past inflation is past. Let it go, Larry.
