The Latest Bout of Inflation Doom-Mongering Doesn’t Add Up
Last week’s inflation data prompted an outpouring of alarmism and calls for the Fed to squeeze the economy even harder. Here’s why the doomsaying is wrong.
Over the past few weeks I’ve been writing a series of articles about inflation and theories of inflation, and how and why those theories have changed over time. I’m not done yet — we’re only up to the late 1950s and Milton Friedman has only just made his appearance — but I think it’s worth pausing to take stock of the current inflation situation. What can those theories, and that history, tell us about the post-COVID outbreak of inflation we’re still dealing with today?
Last Friday, we got a new batch of inflation data, along with a few other key metrics, and the news was bad: the front-page headline in Saturday’s New York Times was, “Measure of Inflation Speeds Up, Muddling Hope of Easy Recovery.” The measure in question is the price index for household purchases — the Personal Consumption Expenditures, or PCE, price index — whose annualized growth rate jumped to 7.7% in January, compared to 2.4% the previous month. Core PCE, the Fed’s preferred inflation metric, which strips out food and energy prices, also jumped, rising to a 7.1% annualized rate, compared to 2.6% the previous month.
The Times write-up was gloomy: “There was a moment, late last year, when everything seemed to be going according to the Federal Reserve’s plan: Inflation was slowing, consumers were pulling back and the overheated economy was gently cooling down. But a spate of fresh data, including worrying figures released Friday, make it clear that the road ahead is likely to be bumpier and more treacherous than expected.”
Even more somber was Jason Furman, the former chair of the Council of Economic Advisers under Barack Obama, a frequent collaborator of Larry Summers’s who, like Summers, has been a prominent voice of inflation hawkery. (“The Fed Has to Stay the Course Against Inflation” was the headline of a Furman op-ed in the Wall Street Journal last October.)
“The economy is very overheated,” Furman tweeted shortly after last Friday’s data release:
Furman’s numbers are accurate, of course. But is all this gloom really justified?