The CPI brought out some mostly good news on Wednesday. Overall inflation is 3.0% for the year. That's higher than policymakers want to see but it's also the lowest year-on-year increase we've seen in a long time. But . . .
(*ugh . . . it's awful when an economic teacher does that, or anyone for that matter. "But" essentially cancels out what came before that conjunction. Let's go with "that being said" . . . wordier, but not as dismissive.)
The inflation numbers are good news but come with a lot of caveats. Food is still up 5.7%. Core inflation is still up 4.8%. Energy is down nearly 17% (!) but that is flighty and could be reversed next month. Also, it's possible we're experiencing pain at the cash register due to base effects. In other words, only up 3% isn't too bad but it's up 3% from a pretty nasty number last year.
In addition to energy, a few other items fell year-over-year. Airline fares are down. Used cars and trucks, too. The subcategory "meats, poultry, fish, and eggs" fell a smidge, too. Some prices are normalizing like new vehicles, apparel, and hospital services. Rent and rent equivalents are up, which is problematic for those renting their shelter (and possibly good for people who don't . . . it means real estate values are rising). One item that really concerns this father: motor vehicle insurance is up nearly 17%. Yikes. That is certainly an increased expense for this household (our vehicle policy is now more than $4,000 a year).
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Sorry to say but we're about a year and a third away from the next presidential election. Many voters vote with their wallets, and the 2nd economic quarter of a presidential year factors heavily in election results. I don't foresee the horrific conditions occurring in April-June '24 to be like those that dislodged Donald Trump in 2020. But we could be living through an uneasy expansion at that time, and that could sway the vote against Joe Biden.
Many economists predicted we would suffer a recession in 2023. Many say it's still on the way. But we've avoided it so far. And I've heard some interesting explanations for why that's the case. My favorite is that the U.S. has been going through a rolling recession with some sectors and areas suffering, but others not and that suffering isn't enough to become a downturn in the aggregate. Also, it's possible the Fed pulled off a soft landing or is in the process of doing so. It could be that we're living in the economic equivalent of a plane that is circling the runway waiting until it's clear to land.
It's also possible that we're just really resilient as an economy. China, by the way, is going through a hard time. Their economy has slowed down and is in recession. They've failed to bounce back from Covid-induced shutdowns the way we have. And part of that is attributable to how much of their economy vs. ours is built around consumer spending. China's economy has a preponderance toward investment and savings, something one would think is good. But as has been the case with Japan, household spending may not be robust enough to really power the economy the way America's households do. Perhaps that's why we've had a rolling recession: sectors were buoyed by our surges in dining out, dining in, buying furniture, revenge travel (and so on).
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For most of my career it's been hard to make my students care about the problems of unanticipated inflation. As you can surmise, it's not as hard to do now. They've seen prices escalate. They've heard their parents complain. My job now is to remind them that inflation measures tend to exaggerate which should temper one's reaction to a published list of inflation figures.
We are living through a moment, though, that shows an interesting dilemma with economic policymaking. Many do root for the Fed to rid us of inflation by jacking up interest rates enough to get to a 2% target rate. But economists contend that that would cost people their jobs. Let's put a number to it: we would probably need to see an unemployment rate of about 6.5% to get inflation down to 2% right now. Yikes. That's five million more Americans unemployed. That's what I would call an ugly tradeoff.
I'm mesmerized, then, at how inflation tends to be a greater problem for the rich than the poor. And that may seem paradoxical, but our country's experience has shown me how people of means have good reason to fret over unanticipated inflation. They are likely salaried and cannot work extra shifts to cope. They have savings, and the real value of those savings dwindle as prices rise. Calling for the Fed to do something dramatic is easy to make because someone else will be the job loser, and rich folks have more to fall back on in the event they are laid off.
Poorer folks don't suffer as much. Wages for shift work usually rise more quickly than salaried gigs. And there's probably sufficient demand for one's boss to give one more shifts. There are ways to cope.
The inflation is corrosive, though, and I've seen how it colors a lot of conversation that people have. And complaints about inflation linger even as the pace at which it occurs is cooling down. So we sit here in July 2023 and see news that's more good than bad, but we have lots of reasons why we expect better. I hope it gets better. I'd really like to see a good third quarter about nine months from now.
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