‘Curb your enthusiasm’: Is the inflation storm really letting up?

What explains falling inflation? It now looks as if much, although not all, of the big inflation surge reflected one-time events associated with the pandemic and its aftermath — which was what “Team Transitory” (including me) claimed all along, except the transitory effects were both bigger and longer lasting than any of us had imagined.

First came those supply-chain issues. As consumers, fearing risks of infection, avoided in-person services — such as dining out — and purchased physical goods instead, the world faced a sudden shortage of shipping containers, port capacity and more. Prices of many goods soared as the logistics of globalisation proved less robust and flexible than we had realised.

Then came a surge in demand for housing, probably caused largely by the pandemic-driven rise in remote work. The result was a spike in rental rates. Since official statistics use market rents to estimate the overall cost of shelter, and shelter, in turn, is a large part of measured inflation, this sent inflation higher even as supply-chain problems eased.

But new data from the Cleveland Fed confirms what private firms have been telling us for several months: Rapid rent increases for new tenants have stopped, and rents may well be falling. Because most renters are on one-year leases, official measures of housing costs — and overall inflation numbers that fail to account for the lag — don’t yet reflect this slowdown. But housing has gone from a major driver of inflation to a stabilising force.

So, why shouldn’t we be celebrating? You can pick over the entrails of the inflation numbers looking for bad omens, but I’m ever less convinced that anybody, myself included, understands inflation well enough to do this in a useful way. Basically, as you exclude more and more items from your measure in search of “underlying” inflation, what you’re left with becomes increasingly strange and unreliable.

Instead, my concern (and, I believe, the Fed’s) comes down to the fact that the job market still looks very hot, with wages rising too fast to be consistent with acceptably low inflation.

What I would point out, however, is that many workers’ salaries are like apartment rents, in the sense that they get reset only once a year, so official numbers on wages will lag a cooling market, and there is some evidence that labour markets are, in fact, cooling. Official reports in January — especially on job openings early in the month and on employment costs at the end — may (or may not) give us more clarity on whether this cooling is real or sufficient.

Oh, and with visible inflation slowing, the risks of a wage-price spiral, which I never thought were very large, are receding even further.

So, we’ve had some seriously encouraging inflation news. There are still reasons to worry, and the news isn’t solid enough to justify breaking out the champagne. But given the season, I am going to indulge at least in a glass or two of eggnog.

This article originally appeared in The New York Times.

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