Seth Wenig/AP Photo
Traders work on the floor of the New York Stock Exchange as Federal Reserve chairman Jerome Powell speaks after announcing an interest rate increase, November 2, 2022, in New York.
This story is part of a Prospect series called The Great Inflation Myths, which takes on the dominant orthodoxies mainstream economists and the Federal Reserve have been espousing about inflation and the need for interest rate hikes to tame it. The series was developed in collaboration with the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst. You can read every piece in the series at prospect.org/
From the beginning of July to the end of November last year, the U.S. consumer price index rose in total by 1 percent—an annualized rate of 2.4 percent. If you find this number surprising, chances are that’s not because it is so high, but because it is so low.
In these same months, we were bombarded in the news media by reports of soaring inflation. Fox News, always eager to score political points against the Biden administration, was not alone in spinning this overheated story. The New York Times joined the chorus, too. So did USA Today, which in mid-December described the Fed’s latest interest rate hike as a step to “tame soaring inflation.”
“Soaring”—at 2.4 percent? The Fed’s target rate for inflation is 2 percent per year. Never mind that this is an arbitrary number fixated upon by monetary-policy officials rather than dictated by economic logic. The point is that 2.4 percent is pretty close. It also happens to have been the average annual rate from 1990 to 2021, when inflation was a nonissue.
Why the disconnect between what was happening in the economy and what was reported in the news media? It reflects the misleading habit of equating the inflation rate over the past 12 months with the inflation rate right now. This is also a habit of the Federal Reserve, which in turn influences how media coverage characterizes inflation.
By the past-year measure, the inflation rate at the end of November was roughly 7 percent—the difference between price levels in November 2022 and November 2021—despite the fact that for the last five months it was only 2.4 percent per year. In the seven preceding months, December through June, the annualized inflation rate was much higher at 10.2 percent. Putting the two periods together, the price rise for the past year averages 7 percent.
The fault is not in the arithmetic, but in the meaning of “now.” In normal parlance, now refers to the present time. As I write these words on a chilly New England morning, the temperature outside my window is 10 degrees Fahrenheit. If I were to claim that it really is a balmy 50 degrees—on the grounds that that’s the annual average—you would conclude that I was either delusional or disingenuous.
When talking about inflation, we usually refer to the rate per year. But this is not the same thing as the rate over the past 12 months. Similarly, your car speedometer shows how fast you’re driving in miles per hour, not how far you drove in the last hour. Say, for example, that you cruised along an interstate highway at 75 mph for 40 minutes, and then exited onto a back road where you’ve been driving at the 30 mph speed limit for the past 20 minutes. You are now doing 30 miles an hour, even though altogether you logged 60 miles over the past hour. No police officer is going to ticket you for speeding.
There is room for debate about the causes of the past year’s inflation. The COVID-19 pandemic and the war in Ukraine triggered supply shortages and pushed up prices worldwide. Corporations seized the time to ratchet their profit margins to the highest level in 70 years, and this drove up prices, too. In this context, the stimulus spending undertaken by the Biden administration to revive the economy and start rebuilding neglected infrastructure played a role, as well, by boosting demand.
We also can debate the wisdom of continuing to raise interest rates. At his last news conference of 2022, Fed chairman Jerome Powell described the aim bluntly: “Reducing inflation,” he explained, “is likely to require a sustained period of below-trend growth and some softening of labor market conditions.” The language is revealing: “softening” here means making things easier for employers but harder for workers. Some defend the latest interest rate hike as a prudent move to extinguish lingering embers of inflation; others see it as a callous move to extinguish lingering hopes for better jobs and higher incomes among working people.
One thing that should be relatively indisputable, however, is the inflation rate itself. By any sensible standard, inflation since mid-2022 has not been “soaring.” On the contrary, it has fallen back to the baseline level of the past three decades. Inflated numbers only muddy inflation debates.
