How is the war on inflation going?

The US economy is not currently in a recession.

No, two quarters of negative growth are not, regardless of what you may have heard, the “official” or “technical” definition of a recession; this determination is made by a committee which has always based itself on various indicators, in particular employment growth.

And how Jerome PowellFederal Reserve chairman noted the job market on Wednesday still looks strong.

That said, the US economy certainly is slow downbasically because the Federal Reserve is deliberately planning a slowdown reduce inflation.

And it’s possible that this slowdown will eventually be severe and large enough to earn the R label.

In fact, on this question I think I am a little more pessimistic than consensus.

I think the odds are at least 50-50 that history will say we experienced a mild recession in late 2022 or early 2023, which caused a modest rise in the unemployment rate.

But what’s in a name?

The real question is whether a moderate slowdown, called a recession or not, will be enough to control inflation.

And the news on that front has been rather encouraging lately.

Obviously, gasoline prices have gone down:

nearly 80 cents a gallon from its peak in mid-June.

Remember those scary stories about $ 6 a gallon in August?

More importantly, business surveys, which often detect economic turning points long before official statistics, are starting to suggest a significant decline in headline inflation.

For example, an S&P Global survey found that as private sector companies continue to raise prices, the inflation rate “fell to a 16-month low.”

The financial markets have noticed this.

The expected rate of price increase in the next year implied by the inflation swap markets (don’t ask) plunged from over 5% in early June to 2.45% on Thursday morning.

Medium-term inflation expectations too I’m down.

Now, it is too, too early to declare victory in the fight against inflation.

there have been several false sunrisess on that front over the past year and a half.

And there is a lot of room to discuss the “core” inflation level, a loosely defined term, but in general, the part of inflation that is difficult to reduce once it rises.

The serious economists I speak to are very eager to see the release of the labor cost index on Friday, which should measure what is happening with labor costs.

Will it confirm or contradict the apparent slowdown in wage growth visible in simple measures of average wages and at least in an influential survey?

Well, we’ll have to wait and see.

The good news is that politicians seem willing to do just that.

In my view, the most encouraging aspect of Wednesday’s Fed statement was the paragraph stating that the monetary policy-setting committee is willing to be flexible, that it “will continue to monitor the implications of incoming information” and “he would be ready to adjust monetary policy accordingly”.

this is a refusal not too thin of the inflation hawks’ demands that the Fed commit now now now in a long period of extremely limited money.

As I have suggested, the first signs are that the Fed is winning its war on inflation, and it is doing it faster and easier than most observers expected.

What will it mean if these early omens are confirmed?

The big answer, I would suggest, is that we will have to reevaluate recent economic policy.

As everyone should know (although many probably don’t know), the US economy has been remarkably successful restoration of jobs lost during the pandemic crisis.

This good news has been overshadowed by high inflation, which has led to many claims that US economic policy has it all wrong.

But much of the recent inflation reflects global forces beyond US control, which is why inflation has risen almost everywhere, not just here.

And if the portion of excess inflation that reflects US policy can be reversed quickly enough, without high cost, a correct reading of the documentation would say that the policy has indeed been very successful, that a temporary increase in inflation has been a price to pay for. which is worth paying for avoid the kind of long-term depressed economy we experienced after the 2008 financial crisis.

That said, for a time it appeared that a wave of inflation had caused permanent, even catastrophic, damage through the political process because it undermined the prospects for meaningful action on climate change.

An episode of high inflation is not the end of the world; lack of climate action it might as well be.

But on Wednesday (!) Senator Joe Manchin said he believed a climate change bill would actually reduce inflation.

He will do it.

While I’m not ready to count my chickens until they’re formally signed into the Oval Office, right now it looks like we’re on a rapid recovery and desperately need investment in America’s future.

So while the preliminary GDP figure (which is likely to be heavily revised) was negative, from my point of view, the overall economic news looks pretty positive.

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