A Beautiful Inflation Report
Opinion Columnist
One of my go-to economic data experts emailed on Thursday morning about the latest inflation report, which showed prices actually falling in June and up only 3 percent over the past year. It was, he declared, “beautiful.”
Your aesthetic sense may vary, but we’ve now had two months of really good price data, enough to puncture the bubble of pessimism that, um, inflated early this year. And the implications of the good news are pretty big.
Early this year we had several bad reports, which led to widespread concern that inflation had stopped falling and might even be increasing; some even suggested that the Fed might want to increase interest rates rather than begin cutting.
Many economists argued, however, that the bad data was just noise, largely reflecting one-time price resets at the start of the year. They have now been vindicated. Note that the Federal Reserve focuses not on the Consumer Price Index but on an alternative measure, the personal consumption expenditure price index, which isn’t in yet for June. But estimates based on the data available so far suggest that the P.C.E. will come in at around 2.4 percent, close to the Fed’s 2 percent target. And since the Fed is supposed to skate to where the puck will be, not where it is right now, there’s now an overwhelming case for interest rate cuts.
Economists who told us not to panic over a few hot inflation reports aren’t the only people who have been vindicated. Taking a longer view, the White House economic team also has every right to a victory lap. Here’s what the team said three years ago:
No single historical episode is a perfect template for current events. But when looking for historical parallels, it is useful to concentrate on inflationary episodes that contained supply chain disruptions and a spike in consumer demand after a period of temporary suppression. The inflationary period after World War II is likely a better comparison for the current economic situation than the 1970s and suggests that inflation could quickly decline once supply chains are fully online and pent-up demand levels off.
That process took longer than expected, but in the end played out almost exactly the way they predicted. And yes, as someone who held similar views, I’m feeling some personal satisfaction.
Stepping back even further, whatever you think President Biden should do next — I’ve said my piece — the inflation news is a big vindication for Bidenomics. The administration was harshly criticized for its spending, which critics claimed would lead to ’70s-type stagflation. Well, it didn’t, and big spending has helped the U.S. economy power ahead of peer nations.
All in all, a very good morning on the economic front. Now, if we can only clean up the political mess … .
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
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