Wild Inflation? Not Anymore.
Do Americans understand what is happening with inflation in this country? This is an important question, because the public’s perception can influence national policy and political choices. Before the midterm elections one month ago, 87% of likely voters told pollsters that inflation was extremely or very important in deciding their vote.
Let’s take a simple example of what most Americans see most in the news, and compare this with the data that economists, and journalists who cover the U.S. economy, are looking at.
This week our government released the November data for the Consumer Price Index, and the headline number was 7.1%; which was down from 7.7% last month, but still a very high rate of inflation for the United States. The phrase, “highest levels since the early 1980s” has accompanied much of the reporting for the last few months.
But these numbers are, in some very important ways, out of date.
It’s true that prices as measured by the Consumer Price Index (CPI-U) in November of this year were 7.1% higher than a year earlier.
But if we look at the five months that we have just experienced (July through November), the bigger news is really how much the rate of inflation has been coming down.
For these five months, annualized inflation has been just 2.5%. Just to be clear: That 2.5% is not the increase in prices over these five months (July through November). It’s the increase in prices that we would have if this inflation over five months continued for a year.
By contrast, the annualized inflation of the five months prior to July (February through June) was 11.8%.
Although the Fed’s target is 2% (the Fed uses a different measure of inflation than the CPI but pretty close to it), most economists would not be worried about inflation of 2.5%. In fact some of the world’s most prominent economists would favor 3%, over 2%, as a target.
There is a long list of facts and issues known to economists that have led many of us to less alarmist views than those of the wider public, including some politicians. For starters: The spike in inflation over the last 18 months was primarily a result of external shocks: The war in Ukraine was a big one, especially for gasoline prices.
