US inflation has been rising and now falling. How close is the US economy to completing its round trip? To help you think about this question, here are some useful numbers from the post. Economic Advisory Council Blog.
(For those unfamiliar with the CEA, it is administratively part of the White House. It has about 30 staff members. The three “commissioners” in charge are appointed by the president and confirmed by the Senate. However, the commissioners mostly come from academia and/or think tanks, and usually return to the main agency after a few years. So while the commissioners are all politically partisan, they have reason to be careful not to go too far in the direction of jeopardizing their credibility when they return to the main agency.)
This graph is taken from a post titled ““From Apples to Eiffel: Recent Inflation Trends in the G7” (June 27, 2023). Each government’s statisticians measure inflation in slightly different ways in each country (e.g., by measuring the cost of renting and owning a home). The harmonized consumer price index uses a common measure that allows direct comparisons across countries.
As you can see from the graph, inflation has been rising in these major economies, but it has been rising first in the United States. While inflation appears to have peaked or begun to decline in the major economies, the decline began earlier in the United States. (For a recent analysis by some Federal Reserve economists, see here.) Why is that?
One hint is given in a figure from a speech by CEA Chairman Jared Bernstein.“The (almost) round trip of inflation: what happened, how did people experience it, and what did we learn?” As Bernstein emphasizes, the cause of inflation is increased demand, much of which came from fiscal stimulus programs during the pandemic, when supply was constrained by tangles in global supply chains and limited economic activity during the pandemic. Supply chain disruptions, such as the surge in energy prices following Russia’s invasion of Ukraine, also played a role.
On the horizontal axis, this chart shows the cumulative impact of discretionary fiscal support from just before the pandemic began in late 2019 to early 2024. The cumulative support in the United States is much higher than in other countries. Not coincidentally, the United States had higher real GDP growth during this period and also started the inflation process a little earlier than other major economies.
Bernstein argues that the decline in inflation is essentially a result of supply constraints as the pandemic eases. At least in this speech, he does not mention the Fed’s role in the timing or pace of the decline in inflation. This suggests that the Fed is unwilling to allow the inflation surge to become entrenched through its willingness to raise rates.
But economists and real people tend to see inflation decline differently, a point Bernstein made in different terms. When inflation gets back up to the Fed’s 2% target, economists feel “mission accomplished.” Real people, however, are dissatisfied because they know that prices are higher than they were and wages may not keep up.
These figures come from a recent CEA post. “CPI Report July 2024” (August 14, 2024). It shows how inflation has been rising faster than wage growth since late 2021 and early 2023, but average wages have been growing faster than consumer price inflation for more than a year since then. This is generally good news, as it means that workers are regaining lost purchasing power, but it is not a celebratory slogan, so it is not good news that will bring much joy.
I claim to be no expert in predicting the future. In fact, my general view is that we only understand the economy after a lag of about two or three years as the evidence makes itself clear. But for the record, the Fed focuses on a specific measure of inflation based on “personal consumption expenditures,” and it looks at a “core” measure of PCE inflation that excludes energy and food price volatility. Here’s what it looks like:
As you can see, the overall rate of this benchmark inflation measure is declining, but the 12-month average is still not at the 2% target. The Fed has been very vocal over the past year or two that it will keep rates relatively high compared to the past decade or so in order to reach the 2% target. Also, central banks generally like the credibility that comes from keeping promises. Bernstein said in his July 30 speech that “the round trip of inflation is not yet complete,” and I think the Fed thinks the same.
