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John Cassidy has been a staff writer at The New Yorker since 1995, writing extensively about economics and politics. This week, we caught up with him to talk about the latest inflation numbers and other risks facing the economy.
The headlines generated by Tuesday’s Consumer Price Index (C.P.I.) report for March highlighted that inflation is at a forty-plus-year high. What does a deeper dive into the numbers tell you? What’s especially scary, and is there any good news?
Inflation is a composite figure—an index—that is put together from countless transactions across the economy. It’s only when you start to disaggregate the index that you see what is really going on. Last month, the most noticeable developments were the big jumps in the price of energy and food, both of which can be traced, to a greater or lesser extent, to disruptions caused by the war in Ukraine. Also, on the negative side, there were some signs of higher energy prices feeding into price rises in other parts of the economy, including the huge service sector. Take delivery services and laundry/dry cleaning, both of which use a lot of energy, where prices have risen by double digits in the past twelve months. Because of developments like these, the C.P.I. over all rose by 1.2 per cent in March, and by 8.5 per cent in the previous twelve months. But, if you exclude the food and energy components, you find that prices rose by 0.3 per cent in March, which was less than the 0.5 per cent rise in February. So there was a bit of good news in there, which is consistent with the projection that over-all inflation is approaching its peak or has already done so. On Tuesday, most of the news headlines ignored this angle, but investors on Wall Street didn’t. The yield on ten-year Treasury notes, which reflects expectations of longer-term inflation, actually fell a bit.
The economist Larry Summers, who warned early on about the dangers of inflation—and whose arguments you explored in depth last week—has written that a recession is now likely. How would we get from here to there? What other outcomes are possible?
Rising inflation itself doesn’t cause a recession. In fact, it is often seen as an indication that an economy is growing too rapidly relative to the supply of labor and other resources. The danger is that rapidly rising prices can prompt policymakers, particularly those at the Federal Reserve, to slam the brakes on the economy. Summers is highlighting the danger that the Fed, if it doesn’t quickly get inflation under control, could be forced into taking really drastic actions—that means really big interest-rate hikes—which would not merely slow down the economy but plunge it into a deep recession. That’s what happened in the early nineteen-eighties. Defenders of the Fed say that it still has a decent chance of cooling down the economy and bringing down inflation without causing a recession—that’s the scenario known as a soft landing.
Where you stand in this debate largely depends on how you interpret the recent inflation spike. If you think that it’s largely driven by pandemic-related disruptions, such as snafus in the global supply chain, and that it will gradually unwind as these problems get resolved—and, hopefully, the war in Ukraine ends—then it follows that you would think the Fed has a decent chance of achieving its goals. If, on the other hand, you believe that inflation is a product of excessive demand for goods and workers, and that it’s starting to get permanently ingrained in the economy, you would be skeptical of the Fed’s prospects. So, a great deal comes down to how you interpret the inflation surge—and that was mainly what I wrote about in my article.
You’ve written about the story that Biden and the Democrats should be telling about the employment numbers, COVID-relief legislation, and inflation. Is there any politically convincing argument to be made that the economy is performing well in the face of the pandemic when gas, food, and all the rest are suddenly so expensive?
From an economic perspective, Biden is getting something of a raw deal. If you look at employment, for example, the economy has created more jobs in the first year and a bit of his Presidency than in any prior one. The unemployment rate has gone from 6.4 per cent to 3.6 per cent. That’s a big change, and, historically speaking, you’d expect the President to get some political credit for it. In terms of messaging, though, it is very hard to shift attention away from the inflation spike. Maybe the media is partly to blame for that, but it’s also because the price rises are visible to nearly everyone on a daily basis, and, therefore, very salient. Gas prices provide the most obvious example. But the saliency point also applies to things such as heating bills and the cost of food, which has gone up nearly nine per cent in the past twelve months.
This environment creates a really tricky political challenge. If the White House tries to make the argument that, yes, rising inflation is a very unwelcome development but there are also a lot of positive developments in the economy, it gets accused of being out of touch. So it is now intensely focussed on ameliorating the inflation problem. The President is doing things such as trying to unclog the ports, releasing more oil from the Strategic Petroleum Reserve, and, on Tuesday, announcing that he will waive a summertime ban on gasoline that contains more ethanol and is a bit cheaper. It’s not clear yet whether these moves will increase Biden’s approval rating. If you look at the poll averages, however, it does seem to have stopped falling. The White House will take some comfort in that and hope that the 8.5-per-cent figure for inflation marked the peak.
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