It Isn’t Time for an Inflation Victory Lap

National Review Online

Friday, July 14, 2023

 

The moderation in the most recent consumer-price-index (CPI) report from the Bureau of Labor Statistics is an encouraging sign — but only that. It doesn’t mean inflation is no longer a threat, and it doesn’t mean that Democratic policies have succeeded.

 

First, while the rate of inflation has declined, it is still too high. The Federal Reserve must stick to its 2 percent target, and the measure it uses, growth in personal consumption expenditures (PCE), is still roughly double that.

 

These percentages are all year-over-year. Energy prices peaked last summer and are therefore pulling down the average. Since March, core PCE inflation (which excludes food and energy prices, and is usually better at indicating inflation trends) has been above total PCE inflation. In fact, core PCE inflation has been stubborn at around 4.6 percent for the past six months.

 

Just because energy prices are down from their peak last summer does not mean Americans aren’t still feeling the squeeze. The week Joe Biden took office, the national average gasoline price was $2.29 per gallon. From that week to the week before Russia invaded Ukraine — so it wasn’t Putin’s fault through that point — the price of gasoline increased by about a dollar per gallon.

 

Food inflation, according to the consumer-price index, is down from its 11.3 percent year-over-year peak in August 2022 and came in at 5.7 percent in June. But food prices are still 18.7 percent higher than they were the month Biden took office.

 

The president is not responsible for the price of gasoline or the price of food. It’s still worth noting that the accumulated consequences of higher prices remain, and that declines in the rate of inflation do not mean lower prices.

 

The president is, however, responsible for the American Rescue Plan Act, which his party passed with zero Republican supporters. The Democrats flooded the country with almost $2 trillion in unnecessary government spending. It was branded as Covid relief but was passed three-quarters of a year after the Covid recession was over, and the spending is still working its way through the economy today. That infusion of unnecessary cash, which even some left-leaning economists warned would be inflationary, made the Fed’s already difficult task even harder.

 

Some of the self-identified members of “Team Transitory,” those who argued that inflation was due to momentary factors that would soon dissipate, are claiming vindication from the most recent CPI report. They shouldn’t. Dividing a complex macroeconomic debate into two teams was silly in the first place. It was not clear what the opposite of “transitory” was in this context. Nobody thought the inflation rate would keep increasing forever, so the question was simply how “transitory” it would be.

 

The surge in the money supply as a result of expansionary monetary policy from the Fed and a boatload of government spending led to 500 basis points of interest-rate hikes to try to sop it up. The average 30-year mortgage rate was around 3 percent as recently as December 2021. Today, it’s almost 7 percent. Some banks were poorly prepared to face interest-rate risk for the first time in decades and collapsed.

 

Speaking of interest rates, they’re a big risk for the federal budget as well. Many spending decisions in Washington were based on an assumption of low interest rates that no longer obtains. All of this was a consequence of the necessary monetary-policy response to the “transitory” inflation.

 

And the Fed’s work is not done yet. The overall level of spending in the economy continues to be elevated, which indicates monetary policy might still be too loose. Though it’s possible for inflation to spike once and return to normal, it would be unusual for it to do so. In the past, when the Fed has lost control of inflation, it spiked multiple times. The Fed’s capacity for monetary-policy errors should never be underestimated.

 

The Democrats’ so-called Inflation Reduction Act, which progressives accurately described as a climate-policy and health-care bill after it passed, had nothing to do with the decline in the inflation rate. Celebrating victory over inflation while many Americans continue to feel the squeeze of higher prices will not endear Democrats to voters.

 

Energy prices are no longer at record highs, and the aftereffects of Democrats’ irresponsible spending are less severe than they were. If Democrats want to define success down that far, that’s their choice. Republicans should make clear that voters don’t need to settle for it, and there is a better way.