Inflation: Still not whipped
Summary
- Durable price rises in September highlight the risks of rapid Federal Reserve easing.
The September price data released Thursday put a statistical gloss on what voters already know: Inflation remains persistent. This is an October non-surprise in this presidential election year, and perhaps an uncomfortable moment for Federal Reserve Chairman Jerome Powell.
The headline consumer-price index increased 2.4% year-on-year in September, a slight deceleration in the rate of price increases after the 2.5% reading for August and 2.9% in July. But the so-called core measure, excluding food and energy, remains stubbornly high—3.3% in the latest data, 3.2% in August, 3.3% in June, 3.4% in May and so on. As long as the inflation rate is positive, prices are increasing. This at a time when inflation-adjusted weekly earnings remain well below their January 2021 level, despite recent improvement.
Some economists say chronic problems measuring housing costs make inflation appear higher than it is, which may be true. The Fed prefers an entirely different data series, personal-consumption expenditure, which has indicated a core inflation rate below 3% in recent months.
But voters know how much they’re paying for eggs, auto insurance, electricity, children’s clothing, butter, haircuts, and other goods and services whose prices keep rising well above the Fed’s target of 2%. Any Democrat still confused about why Kamala Harris is in a tight race rather than cruising to victory against Donald Trump should mute the Wall Street talking heads on CNBC and go to a supermarket.
As for Mr. Powell, the inflation data highlight the risk he took last month when he cut short-term interest rates by 50 basis points. The Fed’s economic models led officials to worry the labor market may soften soon without lower rates, and meanwhile the same spreadsheets seemed to suggest inflation was on a glide path to 2%. This gave Mr. Powell scope to focus more on unemployment, though the minutes released Wednesday of the last Fed monetary-policy meeting show that some participants preferred a 25-point cut.
The Fed’s inflation prediction might still turn out to be true, and markets took Thursday’s data in stride on that hope. If Mr. Powell—and households—are lucky, inflation will resume its downward drift in the months ahead.
But those models didn’t predict inflation’s surge in 2021 and the Fed was nearly fooled by a false disinflation dawn early this year. There’s much the Fed and the rest of us don’t understand about this post-pandemic economy, but it’s too soon to say inflation is beat.
