Is the inflationary storm subsiding?

The national average price of common gasoline fell nearly 20 cents a gallon this Christmas from a year earlier.

Prices at the pump remain higher than during the pandemic, when economic shutdowns have depressed global oil prices, but fuel affordability – measured by the ratio of average wages to the price of gasoline – has returned almost to pre- COVID.

Now, gasoline prices aren’t a good measure of economic health or economic policy success, although if you’d been listening to Republican announcements during the midterm elections, you might have thought otherwise.

But falling gasoline prices are just one of many indicators that the 2021-22 inflation storm is easing.

Remember the supply chain crisis, where freight rates skyrocketed well above normal levels?

It’s over.

More broadly, recent reports on inflation measures that the Federal Reserve traditionally uses to guide interest rate policy have been very, very good.

This will be our winter decrease in discontent?

After the unfortunate shocks of the past two years, nobody wants to get too excited about good news.

I myself, that I underrated inflation risks a lot in the past, I’m having a hard time curbing my enthusiasm, and the Federal Reserve, worried about its credibility, is even more inclined to look for the clouds on the bright side.

And those clouds are there, as I’ll explain in a minute.

It is too early to say all things clear on the inflation front.

But there has been a major role reversal in the inflation debate.

Last year, optimists like me were trying to explain away the bad news.

Now pessimists try to explain the Good news.

What’s really surprising about the improvement in inflation data is that, at least so far, it hasn’t followed the pessimists’ script.

Disinflation, many commentators have insisted, would require a sustained period of high unemployment – ​​say, at least an unemployment rate of 5% for five years.

And to be fair, this prediction could still be justified if recent anti-inflation gains turn out to be a false dawn.

However, inflation fell rapidly, despite unemployment remaining close to historic lows.

What explains the drop in inflation?

It now appears that much, though not all, of the huge rise in inflation reflects one-off events associated with the pandemic and its aftermath – which was what the Transit Team (including me) has always claimed, except they were transient effects bigger and more durable than any of us imagined.

First came the supply chain issues.

As consumers, fearing infection risks, avoided in-person services like dining out and bought physical goods instead, the world was faced with sudden shortages of containers, port capacity and more.

The prices of many products have skyrocketed because the the logistics of globalization has turned out to be less solid and flexible than previously thought.

Then came a surge in housing demand, likely driven in large part by the pandemic-induced increase in remote working.

The result has been an increase in rental prices.

As official statistics use market rents to estimate the overall cost of housing, and housing, in turn, accounts for a significant portion of measured inflation, this has pushed inflation upwards even as supply chain issues supplies have diminished.

But new data from the Cleveland Federal Reserve confirms what private companies have been telling us for several months:

The rapid increase in rents for new tenants has stopped and rents may go down.

With most tenants on annual leases, official housing cost measures and global inflation figures that do not account for the lag still fail to reflect this slowdown.

But the accommodation has gone from being a main engine from inflation to stabilizing force.

Why not celebrate it?

You can delve into the guts of the inflation numbers for bad omens, but I’m increasingly convinced that no one, myself included, understands inflation well enough to do it in a useful way.

In essence, as more and more elements of the measure are excluded in pursuit of “core” inflation, what is left is increasingly strange and Not very reliable.

Instead my concern (and, I think, the Fed’s) boils down to the fact that the labor market still looks very hot, with wages getting up too fast consistent with acceptably low inflation.

What I want to point out, however, is that many workers’ wages are like apartment rents in that they are only reset once a year, so official wage figures will lag behind a cooling market, and there is some evidence that labor markets are, indeed, cooling.

January’s official reports – especially on job vacancies at the beginning of the month and labor costs at the end – may (or may not) tell us whether this cooling is real or sufficient.

Oh, and with the visible slowdown in inflation, the risks of a wage-price spiral, which I never thought were very big, decrease further.

So the inflation news is very encouraging.

There is still cause for concern and the news is not strong enough to keep inflation rising.

c.2022 The New York Times Company