Economy

How the U.S. Economy Is Taming Inflation Without a Recession

Published

1 year ago

September 12, 2023

Early this year many economists held a very grim view about the prospects for reducing inflation without a major economic slowdown and a big rise in unemployment. One prominent economist declared that underlying inflation was at least 4.5 percent and that “all the hoped-for saviors” — that is, forces that might bring inflation down painlessly — “have come and gone.” Inflation, another declared, would be “sticky around 4 to 5 percent.”

Given those expectations, what actually happened amounts to a minor, or maybe not so minor, miracle. Growth, both in gross domestic product and in jobs, has remained solid. But standard measures of underlying inflation are now under 3 percent and falling. Fancier statistical models maintained by the New York Fed tell the same story, and say that underlying inflation has fallen by half since its peak last year.

Now, there may be some bumps in the months ahead, largely involving technical issues. Government statisticians have no trouble estimating, say, the price of eggs; but while they do their best, the methods they use to estimate the prices of services, such as health care, can sometimes produce implausible results that add noise to the data. No, the cost of health insurance didn’t fall 30 percent over the past year. And given noisy data, there may be a few bad inflation numbers in our future.

Nonetheless, the dramatic fall in underlying inflation this year is clearly real, and corroborated by many sources, notably business surveys. Voters, especially Republicans, may believe or claim to believe that inflation is still rising, but while this belief may be politically important, it’s just wrong.

So the big economic question of the moment is: What went right? How did Goldilocks come to the U.S. economy?

As an important new paper from Mike Konczal of the Roosevelt Institute points out, there are two main stories out there that might explain why U.S. inflation has come down so quickly and painlessly. For what it’s worth, these stories aren’t after-the-fact rationalizations, cobbled together to make sense of events nobody expected. On the contrary, several economists, myself included, were telling these stories even during the winter of our inflation discontent, arguing that the kind of soft landing — disinflation without recession — we now seem to be experiencing was indeed possible.

So score one for the optimists. But for reasons I’ll explain in a minute, it matters which of these two optimistic stories was right.

One of the two optimistic stories goes under the unlovely name of the “nonlinear Phillips curve.” To put that in something resembling English, in normal times there seems to be a negative relationship between unemployment and inflation, but it’s pretty weak, implying that the Federal Reserve’s strategy of cooling inflation by raising interest rates, and hence reducing overall demand, would have to cause a lot of unemployment to get inflation back down to an acceptable level. The claim, however, is that in an overheated economy, which we seemed to have last year, the relationship between unemployment and inflation gets much stronger, so that the Fed might need to cause only a modest rise in unemployment to yield a big decline in inflation.

The other optimistic story has, I believe, a better name, although I would say that, since I think I coined it myself: long transitory, a play on long Covid. This is the argument that as late as early 2023 inflation was still elevated because of lingering supply disruptions from the pandemic, but that inflation is coming down now because the economy is finally normalizing.

There could well be truth to both ideas. But the nonlinear Phillips curve explains why inflation might fall with only a small rise in unemployment; it doesn’t do as well in explaining what we’ve actually seen, which is falling inflation without any rise in unemployment at all. (The small uptick in August was probably just a statistical blip.)

Konczal tries to resolve the issue by comparing disinflation across different goods and services. He argues that if improving supply as pandemic effects fade is the main story, we should see inflation falling fastest for goods and services whose consumption has risen the most, because their availability has increased. And that is in fact what we see.

Why does this dispute among inflation optimists matter? Because of concerns that inflation might reaccelerate if the economy stays strong.

After all, if you believe that inflation fell rapidly because of cooling demand, you have to worry that if the economy heats up again, say, because the Fed stops its rate hikes too soon, inflation could quickly rebound. That’s much less of a concern if we’re mainly seeing the effects of post-Covid normalization.

So what I see as growing evidence in favor of the long transitory story is reassuring. That said, of course, policymakers need to stay vigilant.

This argument probably isn’t over. What shouldn’t be an issue, however, is the proposition that inflation has come down far faster than pessimists predicted, at no visible cost.

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Economy

Statistics Canada reports wholesale sales higher in July

Published

14 hours ago

September 13, 2024

Anne Joseph

OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.

The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.

The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.

The personal and household goods subsector fell 2.5 per cent to $12.1 billion.

In volume terms, overall wholesale sales rose 0.5 per cent in July.

Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.

This report by The Canadian Press was first published Sept. 13, 2024.

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Economy

B.C.’s debt and deficit forecast to rise as the provincial election nears

Published

3 days ago

September 10, 2024

Anne Joseph

VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.

Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.

Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”

The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.

Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.

“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”

Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.

Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.

Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.

B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.

The election is expected to be called on Sept. 21, with the vote set for Oct. 19.

“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”

Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.

Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.

The premier said that now is not the time to reduce supports and services for people.

Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.

Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.

This report by The Canadian Press was first published Sept. 10, 2024.

Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.

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Economy

Mark Carney mum on carbon-tax advice, future in politics at Liberal retreat

Published

3 days ago

September 10, 2024

Anne Joseph

NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.

But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.

He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.

Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.

Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.

Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.

This report by The Canadian Press was first published Sept. 10, 2024.

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