Who is afraid of the CPI? | Business

This week three important Inflation Reports. On Monday, the Federal Reserve of New York released its latest rate hike expectations survey, which was very encouraging. On Wednesday, the Bureau of Labor Statistics released its latest producer price report, which was very reassuring. However, the interim document – bad on Tuesday on consumer prices – attracted the most attention.

And look, I understand. After the good report on consumer prices last month, Some people – including, it seems, a few investors – are beginning to hope for a fictional end to high inflation in 2021-2022. This month’s document largely dashed those hopes (which, by the way, long time no share).

In any case, it is important to understand what the report showed and what did not. If they still believed we could bring inflation down to an acceptable level without pain – that is, without a rise in the unemployment rate – Tuesday’s data made that belief more difficult than it actually was. Unfortunately, there will be pain. However, the report offered little indication, one way or the other, of how much pain would be needed or how long it should last.

Economists often analyze these questions based on what happens to core or “core” inflation, and then discuss what is the best metric to use to measure it, baffling the rest. That’s why I really liked the economist Joseph Politano’s alternative formula, which suggests that we distinguish between “clean purges” – a reduction in inflation that will more or less occur automatically when the recent unrest caused by the pandemic, the war in Ukraine, etc. – and “deliberate purges” ‘, which is what happens The Federal Reserve is trying to produce Lowering interest rates.

And things as they are, it is very likely This “deliberate inflation” It leads to job loss. Since the Fed’s rate hike aims to reduce global spending, it will almost certainly lead to more unemployment.

Now, “clean cleansing” is not a myth. In fact, it has been happening recently. General consumer price inflation measured in months slowed dramatically this summer, largely as gasoline prices stopped rising and started falling.

But if we look beyond the numbers, it is clear that a “clean purge” will not be enough. I would like to believe the opposite. In fact, a year ago, I thought the price hike might largely heal itself. However, whichever metric you prefer, core inflation at this point –that will not go away on its ownStill very high and showing no visible signs of subsidence.

Although this revelation apparently shocked the financial markets, it shouldn’t come as a huge surprise. Although interest rates have risen a lot this year, they have not had a significant impact on the real economy. As much as we are said to be in a recession, the fact is that unemployment is still practically at an all-time low, and other measures, such as the number of job vacancies, indicate that the economy in general and the labor market in particular remain overheated. We will not reduce inflation to an acceptable rate until things calm down. However, precisely because no significant cooling occurred, The latest numbers don’t tell us how painful the de-inflation process will be.

The optimistic scenario might be as follows: Raising the Fed rate increases the unemployment rate, but only by about 4%, which is still very low at historical levels, and that is enough for inflation to be 2% or 3%. . The odds of this scenario improve by looking at the evidence—like the New York Fed report I mentioned—that 2022 isn’t the same as 1980. At the time, everyone thought high inflation would continue, so the economy had to be passed through a sieve from order to exclude those expectations. Recent expectations, particularly in the medium term, have been low and declining.

However, pessimists argue that the high rate of job vacancies means that more unemployment is needed to control price hikes than in the past; And (for reasons I don’t quite understand) they dismiss the good news about expectations. For this reason, they end up maintaining that unemployment should increase much more, perhaps above 6%.

As you can imagine, I lean towards the optimistic scenario. I take the outlook data very seriously and believe that the high rates of incumbency are, at least in part, a temporary phenomenon in an economy still adjusting to the effects of the COVID-19 pandemic. But the truth is that no one knows for sure, and the fact that an overheating economy is still driving up inflation doesn’t help resolve the controversy.

The good news is that the Fed seems to know what it doesn’t know. He talks harshly about inflation, because he must maintain his credibility, but also stresses that it is necessary to look at “all the data that arrives,” which means he is ready to ease measures when there is a clear drop in inflation, if it happens. My expectation is that this moment will come sooner than many think, but we will have to wait and see.