The Federal Reserve should remain cautious about inflation.
In September, the annual change in the Consumer Price Index fell to 2.4%, but core inflation, which strips out food and energy, remained high at 3.3%.
Lower oil prices help pull down headline inflation but that could easily reverse.
As consumers rightly sense at the grocery store and the gas pump, cumulative inflation since 2020 has been 22%, averaging 5.06% a year, as measured by the Consumer Price Index.
In China, falling property values, consumer pessimism and overinvestment are pushing down prices for manufactures globally, but those pressures on the U.S prices now appears moderating. In September, non-energy goods only subtracted 0.2% from inflation.
Non-energy services, which compose 61.3% of the CPI, were up 4.7%—shelter rose 4.9% and other non-energy services advanced 4.3%
Prices for essentials like health, car and homeowners’ insurance and diversions like concert tickets continue to rise briskly.
Three lessons bear mentioning.
First, price surges have lasting effects on consumer psychology.
New York Federal Reserve Bank, Conference Board and University of Michigan surveys put one-year expected inflation above 3%, in line with core inflation, and well above the Fed’s 2% target.
Economists believe expectations importantly affect union and individual worker postures in wage negotiations and business planning assumptions. Consider the demands of Boeing’s workers and despite it’s tough financial and competitive challenges, the richness of its multiyear company contract offer.
Stubborn perceptions are one likely reason the study of many economies battling inflation indicates it often bounces back when central banks ease tight monetary policies too soon.
Second, policymakers should take ownership of their mistakes or risk repeating those and not getting much credit for their successes.
Presidents Donald Trump and Joe Biden spent $4.5 trillion for pandemic relief, and the Fed enabled this by purchasing a similar amount of bonds and other securities, greatly expanding the money supply.
Those jacked up consumer demand and took headline inflation to 9.1 percent in June 2022.
Pandemic relief was excessively generous, and workers were slow to return when shutdowns ended, prolonging upward pressures on prices and wages through labor shortages.
The Biden administration, instead of admitting it overspent, continued to run up the federal deficit with the Chips and Science Act and Inflation Reduction Act. Newsmax estimates the Biden administration has spent $10 trillion. This year the budget gap is 7% of GDP, as compared to 4.6% just before COVID.
Now, with businesses ramping up spending on artificial intelligence, new private investment and additional federal debt will compete for new savings in capital markets. Either the Fed lets interest rates settle much higher than pre-pandemic levels or we endure more inflation.
Vice President Kamala Harris blames inflation on monopolization, for example by large private investors using algorithms to set rents, and price gouging, for example, by supermarket chains, but evidence is scant.
Since 2018, supermarket margins have not trended upward and fluctuations were uncorrelated with recent food price spikes.
Algorithmic pricing is common—consider how the airlines and Amtrak adjust fares. Banning AI could easily result in less efficient fare adjustments to ration scarcity during peak demand and fewer discounts when seats are plentiful, limiting opportunities for lower-income travelers.
Championing bans on AI and scapegoating businesses may score with more progressive voters but limit Ms. Harris’ appeal with moderate, swing voters.
Late in 2023, GDP was back on the trend line forecasted just prior to the pandemic, and the economy continues to robustly add jobs.
In most swing states, unemployment is below its pre-COVID levels and the national jobless rate.
Yet, the Biden-Harris Administration gets terrible marks on the economy and inflation, and Ms. Harris struggles to outpoll Mr. Trump in swing states.
Third, economics bends to political agendas.
A cottage industry has emerged to discredit “neo-liberal economics” and lend credibility to the New Monetary Theory notions that large deficits financed by printing money may fund, for example, generous social programs.
Cecilia Rouse served as Mr. Biden’s Chair of the Council of Economic Advisors, now heads the Brookings Institution and has devoted considerable resources attempting to show the recent inflation was caused by supply shortages—“especially a rise in company margins”—and not excessive COVID relief policies.
Margins rise when supplies are short. That’s part of how prices ration, but now many producers of non-essential goods—for example Ikea and Nike— are yielding to pressures to lower prices.
The latter pressure is limited when central banks validate higher prices by printing a great deal of money that enables excessive government transfers to households, consumers are locked up for months and then spend resulting windfall savings as the economy reopens.
To avoid chronic tradeoffs between high interest rates and inflation, the federal government must either cut entitlements, which compose more than 60% of its spending, or impose taxes more in line with those paid in Europe.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.