Jacquelyn Martin/AP Photo
Federal Reserve Chair Jerome Powell speaks during a news conference, December 14, 2022, at the Federal Reserve Board Building in Washington.
For everyone but Federal Reserve chair Jerome (Jay) Powell, the news keeps getting better on the inflation front. For September, October, and November, the annualized rate of inflation declined to 3.7 percent. In November, when prices rose just 0.1 percent, that translates to an annual inflation rate of just 1.2 percent.
The annual inflation rate for this three-month period was less than half of the inflation rate for the first half of 2022. Anywhere except at the Federal Reserve, this moderation is exceptionally good news. But Powell refuses to recognize it as such, since that might prod him to ease off on the Fed’s rate hikes.
Instead, Powell insists on rendering inflation figures based on the preceding 12 months, which translates into a misleading annual rate of 7.1 percent. And he downplays the importance of the unmistakable downward trend.
In his December 14 statement at the close of the bimonthly meeting of the Federal Open Market Committee, which hiked rates another half a point, Powell said, “It will take substantially more evidence to give confidence that inflation is on a sustained downward path.”
In addition, Powell has been willfully blind to the improvements in the supply chain tangle, which as Joe Stiglitz and Ira Regmi have written was the source of much of the inflation. That topic was scarcely addressed in his statement or in the report summarizing the FOMC’s findings.
Instead, Powell focused obsessively on the relatively low unemployment rate as a source of price pressure. Here again, Powell cited averages rather than the dynamics in specific areas of the labor force.
The reality is that wages, on average, have been lagging, not leading inflation. The miserable working conditions in portions of the service sector, such as warehouse workers, and lower-paid workers in the care economy, have translated to pressure for wage increases in those sectors. But this is long overdue and has nothing whatever to do with the kind of general macroeconomic overheating that sometimes justifies higher interest rates.
The old idea of a trade-off between inflation and unemployment is largely defunct because workers today lack the bargaining power that they had in the heyday of a fairer economy when unions were stronger. The weakening of unions has killed the Phillips Curve and the idea that high employment has to create price pressures.
Housing is a key sector where the Fed just gets it wrong. Housing is about 41 percent of the core consumer price index (CPI). All of the real-world indicators of housing costs, such as the Case-Shiller Index and Zillow data, show that housing prices peaked in June and are down several percentage points on an annual basis. According to The Wall Street Journal, actual housing prices have declined for five straight months. But the Fed bases its policy on the imputed rental value of owner-occupied housing, calculated as lagging indicator that is six months out of date (and which never made much sense to include in the CPI).
As a result, the most recent Fed report showed housing costs up six-tenths of 1 percent in November, or an annual rate of increase of 7.2 percent. Economist Jeremy Siegel minced no words in this recent interview with CNBC.
Housing is a key sector where the Fed just gets it wrong.
“Housing at plus .6 percent is a nonsensical number. It’s a bogus number. If housing is going down, tell me what core inflation is. I’ll tell you what it is. It’s zero. Inflation is over.” Siegel added that “if the Fed stopped looking at stale housing data,” they would get that. His advice is that the Fed should begin cutting rates.
In fact, owner-occupied housing prices began coming down well before the Fed’s rate hikes made mortgages more expensive. During the pandemic, more young people moved in with their parents, which cut housing demand. Rental housing costs have also peaked.
Powell also remained stubbornly wedded to a 2 percent inflation target, admitting that, even with the Fed’s past and anticipated rate hikes, the economy is not on track to reach that target even by 2024. So Powell is determined to create a recession for no good purpose other than to hit a price-stability goal that makes no economic sense.
Let’s recall that during the long period following the financial collapse and the Great Recession, the Fed had trouble hitting its 2 percent target because inflation was below 2 percent. The so-called great moderation in prices was the result of the extreme outsourcing to China and the related crushing of worker bargaining power.
When China went into its COVID-related export collapse, that created bottlenecks and raised prices. So with the Fed’s mismeasurement, inflation is staying somewhat above 2 percent. But that is no reason to crush the economy in order to hit a target that is arbitrary to begin with.
For the most part, inflation has been subsiding for reasons that have nothing to do with the Fed’s rate hikes, which take time to have effect. The danger is that the successive rate increases will overshoot the Fed’s own goal, and do real economic damage.
The hopeful news is that some senior people at the Fed are beginning to break ranks. Susan Collins, president of the Boston Federal Reserve Bank, who serves on the FOMC, is concerned that excessive rate hikes could create a recession. Likewise Fed governor Lael Brainard and Esther George, president of the Kansas City Fed, who also serve on the FOMC.
As more data showing falling inflation becomes harder and harder for Powell to ignore, maybe they can talk him off the ledge. There is also some dissent from Fed senior economist staffers.
Throughout January, the Prospect will be running a special package of articles by leading economists, in partnership with the Political Economy Research Institute of the University of Massachusetts at Amherst, unpacking the inflation issue into its several components: what’s really going on in labor markets, why the 2 percent inflation target never made sense, the rise and fall of supply chain inflation, and a good deal more. Stay tuned.
