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The economist Paul Krugman says the war on inflation is pretty much over.And a new report found disinflation had been driven by higher supply, instead of lower demand.This points to a “Goldilocks” scenario, in which inflation cools without a recession.
Though Wednesday’s consumer price index showed US inflation soared 3.7% over the previous year in August, the economist Paul Krugman said the war on inflation “has been pretty much won — without a recession.”
Krugman tweeted after the CPI announcement that though a recession might still occur, it could come as a result of a policy error, not as a needed mechanism for controlling inflation.
Throughout the pandemic, many economists have said that to bring inflation down, unemployment needs to go way up and the economy must drastically slow.
However, in a recent New York Times op-ed, Krugman said some statistical models indicated that since last year, underlying inflation had been cut in half.
Krugman acknowledged the economy might face some bumps over the next few months, particularly due to “noisy data” from estimating the prices of services. That’s perhaps what happened last month, when core inflation was “distorted by lags in the measured price of shelter,” Krugman wrote on X, formerly called Twitter.
He pointed to what some call a “Goldilocks” scenario, in which inflation cools without a recession. Economists at the Federal Reserve Bank of Chicago wrote in a report this month that further monetary-policy tightening might not be necessary, given the 11 rate hikes had already done their work.
A new report from the Roosevelt Institute, a left-leaning think tank, provided a glimpse into why inflation might’ve fallen so quickly without plunging the US into a recession.
Mike Konczal, director at the Roosevelt Institute and author of the study, wrote that while nominal spending was still high and the labor market might overshoot its rate of normalization, inflation was doing “exactly what a ‘soft landing’ would have predicted.”
“A combination of resolving supply shocks and a subtle decrease in demand has driven inflation down dramatically, with no cost to the level of employment,” Konczal wrote. “Patience, and letting the data unfold, is the most important objective for policymakers right now.”
Konczal analyzed the severity of inflation in the second half of 2022 and the first half of 2023 across 123 goods and services from across the economy, excluding volatile food and energy goods. Konczal extracted this data from the Bureau of Economic Analysis’ monthly data on consumer spending.
He found that about 60% of those core items, weighted by their share of total consumption spending, saw prices grow more slowly in 2023 than in 2022. Notably, among items seeing lower inflation, nearly three in four had an increase in the actual quantity bought by consumers.
Konczal said this suggested the slowed price growth was coming from increased supply, rather than decreased demand, given that consumers were buying more of those goods and services.
National supply chains have been improving over a year after the Russian invasion of Ukraine.
This bodes well for the course of inflation and a “Goldilocks scenario,” paving the way toward continued price stabilization without requiring a big drop in demand from higher unemployment, more Fed interest-rate hikes this year, or even a recession.
So inflation may be well on its way toward the Fed’s 2% inflation target, which could amount to cheaper grocery bills, lower car bills, and a still robust jobs market.