In January of this year, the US inflation rate (compared to the same month last year) was 6.4% (announced on February 14). If the price was 100 in January 2022, it means 106.4 in January 2023. Prices are still rising sharply. However, there is a trend toward a decrease in the ‘width of rise’. The inflation rate, which reached 9.1% in June last year, fell for seven consecutive months to 6.4%. However, considering that the inflation rate was 6.5% in December last year, there are bound to be concerns that the ‘falling speed’ is slowing down (6.4%, a mere 0.1 percentage point drop). Moreover, looking at ‘compared to last month’, prices in January rose by 0.5% compared to December 2022, a month ago.
The factor that had the biggest impact on January’s inflation seems to be the ‘service inflation rate’. A whopping 7.6%. ‘Service price’ is a concept contrasted with ‘goods price’ and includes medical expenses, restaurant food prices, insurance premiums, lodging expenses, and rent (a component of housing expenses). In particular, rent accounts for 30-40% of the service price calculation. The rent increase rate reached 7.9% in January after continuing to rise from the 4-5% level at the beginning of last year. Rent increases can be seen as having a significant impact on increasing service prices and, consequently, the overall inflation rate.
To summarize the January inflation rate trend, it fell very slightly ‘compared to the same period last year’, but rather rose ‘compared to last month’. Meanwhile, the service inflation rate is on the rise. The Federal Reserve reduced the scope of raising the base rate from 0.75 percentage points to 0.25 percentage points at the Federal Open Market Committee (FOMC) meeting at the end of January. If the inflation rate in January had fallen to the point where we were convinced that the trend of inflation was settling down, the possibility that the FOMC’s interest rate hikes in March and May would be limited to 0.25 percentage points would have increased. However, as the price trend itself has become very unclear, there are pessimistic views that the US Federal Reserve System (Fed) may increase the range of interest rate hikes to more than 0.5 percentage points.
The most influential pessimist is the Fed. Chairman Jerome Powell recently mentioned service prices, which have risen sharply since fall of last year, as the ‘main enemy’. A focus on service prices further increases the need to significantly increase the unemployment rate. The Fed sees rising wages as the main driver of inflation, because service providers, by their nature, account for an overwhelming share of costs. According to the January employment index, the US labor market is very ‘tight’ (a situation where labor supply is smaller than demand and wages rise), and the unemployment rate is the lowest since 1969. To control service inflation, interest rates must be raised until rising unemployment lowers wage levels.
Former U.S. Treasury Secretary Larry Summers also said in a recent interview with CNBC that “the recent decline in inflation is due to transitory factors.” It is said that the inflation rate is lower than ‘actual’ due to temporary factors such as falling oil prices or used car prices. So Summers argues in an interview that “the greatest tragedy will come” if “the world’s central banks stop fighting inflation too soon.”
Some of the pessimists argue that if the Fed eases tightening, the US inflation rate will fall to the 4-5% range by mid-year and then stick to that level. This is more than twice the inflation target of major central banks (2%). In addition to aggregate demand, it is predicted that ‘fundamental trends’ such as the separation of the US and Chinese economies and the transition to green energy (increased demand for raw materials needed to build a green energy system and increased energy prices due to strengthened regulations) will make high inflation rates commonplace. In an interview with
However, optimists such as Paul Krugman, a professor at the City University of New York, and Joseph Stieglitz, a chair professor at Columbia University, are 180 degrees different. In a New York Times column on January 31, Krugman asserts that “prices rose until mid-2022, but (after that) they are falling at a faster rate than they rose.” The basis is the figures calculated for the inflation rate from the beginning of 2021 to 2022 in 6-month increments (not ‘end of last year’ or ‘last month’). After exceeding 10% in July 2022, this inflation rate will fall rapidly and approach 2% (the Fed’s inflation target) by the end of the year. Inflation rates vary greatly depending on the measurement method.
Inflation rates that depend on the measurement method
Krugman sees the official inflation rate as being much higher than ‘actual’. One of the reasons is rent. The US Bureau of Labor Statistics (BLS) calculates the ‘rent’ metric by calculating both existing and new rents. So, even if new rents fall, it takes about a year for the drop to appear in the official index. New rents in the United States have already fallen significantly since the beginning and middle of last year, but have not been properly reflected in the price index so far. As the rent has an overwhelmingly large influence on the calculation of the inflation rate, it can be assumed that the ‘now’ inflation rate is calculated much higher than the ‘actual’ one.
“I’d say the underlying inflation rate has actually dropped significantly,” Krugman said. “I can’t say the rise in inflation is completely over, but there are good reasons to believe that we can restore price stability without major economic pain.” claim that The ‘economic pain’ here is mass unemployment. Unlike the Fed, Krugman believes that inflation can be controlled without mass unemployment. Why? This is because wage growth in the United States has already been returning to the low level before the pandemic for several months. Contrary to the Fed’s concerns (rising wages → escalating inflation), if wage growth is already falling, there is no need to deliberately raise interest rates to raise the unemployment rate. The indicator Krugman used as the basis for estimating the rate of wage growth is the Employment Cost Index (ECI), which comprehensively reflects changes in the costs companies spend on employment, including not only salaries but also paid vacation and social security expenses. In his column on January 13, Krugman also asked himself, “Could cooling the economy mean a rapid drop in inflation without a large rise in the unemployment rate?” and answered “yes, at least so far.” .
Stieglitz also affirms the “dramatic fall in inflation” in his contribution to
Regarding the vicious cycle of ‘wage increase → price increase’, which the Fed is most concerned about, Stieglitz mocks Powell, saying, “The rate of wage increase is rather lower than the rate of inflation.” “If you slow down the economy badly, you can certainly control inflation. Should that lead to a recession? Chairman Powell and his colleagues seem to be enjoying the anti-economy cheer.”
© EPN