July 13, 2023
The latest numbers on consumer prices arrived on Wednesday, and they were better than even optimists had expected. Even media reports, as far I can tell, generally omitted the “but concerns remain” qualifiers that have seemed mandatory when covering good news about the Biden economy.
Which is not to say that everyone was happy. Republicans are more or less in denial, no doubt worried that they may be losing pretty much their only substantive campaign issue — leaving them with nothing to run on besides wokeness and Hunter Biden. And there have been some fairly peevish reactions from economists who had committed themselves to the grim view that we would face a nasty “sacrifice ratio” — that controlling inflation would require years of high unemployment.
For this report was anything but grim. It strongly suggested that we may be heading for a soft landing — a return to acceptable inflation without a large rise in unemployment. We’re not there yet, and I’ll talk shortly about what may still go wrong. But a happy outcome that not long ago seemed like wishful thinking now looks more likely than not.
To understand what the report told us, you first need to know that few serious analysts paid much attention to the two numbers that dominated most news reports: overall inflation and “core” inflation, excluding food and energy, over the past year.
Overall inflation has been driven largely by clearly temporary swings in volatile prices: The 16.5 percent decline in energy prices over the past year isn’t going to be repeated.
Core inflation, on the other hand, is at this point dominated by official shelter prices, which lag behind market rents by a year or more. So the core number is still reflecting the big 2021-22 run-up in rents, itself probably driven by the rise in remote work rather than what’s happening to the economy now.
So most of us now look at measures that try to bypass these distortions. I’m a fan of “supercore,” core inflation excluding shelter and used cars. Others prefer different measures, but they’re all telling the same story: a rapid decline in underlying inflation even though the unemployment rate is the same as it was a year ago.
Supercore inflation, for example, was 3.5 percent over the past year, 2.7 percent at an annual rate over the past six months and 1.1 percent over the past three months. Even I don’t believe that three-month figure, which was probably depressed by statistical noise, but the six-month number is down from 6.8 percent a year ago — and it’s not too far from the Federal Reserve’s target of 2 percent. And this decline has, as I said, happened without any rise in unemployment.
Why have things gone so well? Part of the answer is probably that until recently, disruptions related to the pandemic were still driving some inflation but those disruptions have been fading away. Part of the answer may also be that when the economy is running hot, policies that cool it down — such as the Fed’s recent rate hikes — may reduce inflationwithout much adverse effect on employment.
So what can still go wrong?
First, this might be a statistical head fake — noisy data might be making things look better than they are, or future data revisions may take away some of the good news. I don’t think that’s happening, but anyone who’s been following inflation data these past few years is always worried about that possibility.
Second, most estimates of underlying inflation are still running significantly above the Fed’s target (although in the case of my preferred measure, not by much), and some economists argue that squeezing out that last bit will be painful. All I can say is that we’ve been hearing such warnings about the “last mile” in fighting inflation for quite a while, and so far underlying inflation has just continued to fall. Also, if getting all the way down to 2 percent will be really hard, should we even bother?
Finally, we might get a recession even if we don’t need one to control inflation. So far the economy has proved remarkably resilient in the face of rising interest rates, but monetary policy often works with a lag, so there might, to mix metaphors, still be a recession in the pipeline.
So we haven’t touched down on the runway yet, and a soft landing isn’t guaranteed. But it now looks amazingly within reach.
And if we do get that soft landing, I hope we’ll see some re-evaluation of economic policy over the past years. Both the Biden administration and the Fed have been the targets of harsh criticism for initially missing the risk that engaging in large federal spending while keeping interest rates low would lead to inflation. But they have presided over a remarkable burst of job creation, not only reversing the job losses from the pandemic recession in one of the fastest recoveries in modern history, but also arguably creating the best job market in a generation.
The 2021-22 burst of inflation was a shock, but if it turns out to have been temporary and ends without major suffering, it will be hard to avoid the conclusion that recent economic policy has, all things considered, been pretty darn good.
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Paul Krugman has been an Opinion columnist since 2000 and is also a distinguished professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman