Has U.S. inflation come down? Yes. We have two main measures of inflation: the Consumer Price Index, which pretty much everyone knows about, and the Personal Consumption Expenditures index, which the Federal Reserve prefers as a guide to monetary policy; explaining the differences between these measures would probably be telling you more than you want to know. Anyway, the P.C.E. is currently looking more benign than the C.P.I., but both show that the rate of price increases over the past year was much slower than it was when inflation was at its peak in 2022:
It’s true that there was an uptick in reported inflation in the first few months of 2024, but the most recent numbers have convinced many observers, not to mention financial markets, that this was statistical noise. Inflation swaps, which allow Wall Street in effect to make bets on future inflation, are implicitly projecting just 2.1 percent inflation over the next year. And it’s really hard to deny that inflation is way down from its peak.
Yet many Americans don’t believe that inflation has fallen, and there are a number of commentators with large audiences insisting that there has been no improvement.
So where is this disinflation denial coming from?
Some of us have seen this movie before. In the aftermath of the 2008 financial crisis, the Fed engaged in “quantitative easing” — loosely speaking, printing a lot of money in an attempt to boost a weak economy — and there were many people insisting that this would lead to runaway inflation. When huge inflation failed to materialize — when theoretical models saying that money-printing wouldn’t be inflationary in an economy with very low interest rates passed the reality test with flying colors — some people refused to accept what was (or actually wasn’t) happening.
Instead, they became “inflation truthers,” insisting that the benign numbers were fake.
Now the inflation truthers are back. This time, however, they come in several variants. And I thought it would be helpful to look at each variant and explain how we know it’s wrong.
The first and most innocent version of disinflation denial — one common among the general public, and not especially connected to partisanship — involves confounding the level of prices with inflation, the rate of change in prices.
Consider the price of food at home, that is, groceries. In this chart the red line shows the overall level of grocery prices since the eve of the pandemic, with February 2020 set equal to 100, while the blue line shows the annual percentage change in grocery prices over the same period:
Anyone who goes food shopping will tell you that stuff costs a lot more than it did a few years ago, and they’re right: Grocery prices are up about 25 percent, and overall they aren’t falling. But the rate at which they’re rising has fallen drastically, from double-digits in 2022 to barely over 1 percent recently. And the latter number is what economists mean when they say that inflation is down.
Now, I imagine many people wish we could get prices back to what they were in early 2020. In fact, trying to do that would be a really bad idea. Still, this is a fairly innocent source of confusion.
Less innocent is the widespread urban legend that official measures of inflation leave out essential goods like food and gasoline, and therefore don’t reflect the true cost of living. I see this legend in my email all the time.
Where did this idea come from? When the government estimates real wages, or defines poverty in a given year, or sets cost of living increases for Social Security, it always uses the whole Consumer Price Index, with nothing excluded. But for analytical and policy purposes — when trying to figure out, for example, which way interest rates should move — economists often look at “core” inflation, which does indeed exclude food and energy prices.
The origins of this practice go back to a 1975 paper by the economist Robert Gordon, who argued that it was useful to distinguish between transitory price bumps caused by shocks like disruptions to world oil markets and “hard-core” inflation that was entrenched in the economy and would be difficult to get back down. Somewhere along the way the “hard” part got lost from the jargon, and it became standard practice to estimate core inflation by excluding food and energy.
This was a reasonable approach at the time, although in an economy disrupted by the aftermath of Covid-19 there was probably a lot more transitory stuff than usual. Notably, the sudden increase in working from home led to a huge but temporary surge in rental rates on new apartments:
Since the B.L.S. estimates housing prices — which are a big part of the C.P.I. — using rents (including an imputation of what owner-occupied housing would rent for), and since housing is a big part of measured inflation, this in itself suggests that traditional core inflation doesn’t exclude enough. And there’s an additional problem, which is that because most renters have leases, average rents, which are what enter the C.P.I., lag well behind new rental rates.
So there’s a good case for going beyond traditional core inflation. But there are two big problems with doing that. One is that the more stuff you exclude from the inflation measure, the more what’s left is dominated by problematic stuff like the price of financial services. The other is that switching measures in midstream runs the risk of motivated reasoning, choosing the measure that tells the story you want to hear.
I’m currently sort of a fan of Multivariate Core Trend inflation — try saying that five times fast — which uses a statistical algorithm to produce a more flexible measure of core and is less subject to motivated reasoning because it’s untouched by human hands. Here’s what it currently looks like:
Two points. First, core inflation is way down. Second, as the figure shows, on an annual basis core measures and plain vanilla inflation are about the same. So no, official estimates aren’t minimizing actual inflation.
Finally, at the lowest rung of inflation trutherism are conspiracy theories, claims that the deep state is simply faking the numbers. For example, recently there has been wide dissemination on social media of the false claim that the B.L.S. has dropped coffee from the Consumer Price Index to make President Biden look better.
One response to this kind of thing is to look at how much detail the B.L.S. provides. To fake these numbers would require that the agency be corrupted from top to bottom, which it isn’t.
Beyond this, we have many independent indicators of what’s happening to inflation, and they all more or less match the official numbers. Let me give just two examples.
Surveys of purchasing managers, like the one conducted by S & P Global, normally ask companies whether their costs have gone up or down in the past month. The percentage saying costs are up has historically been closely correlated with the inflation rate. Here’s what the index says now:
It’s telling the same story about falling inflation as the official data.
Another example: The Atlanta Fed regularly surveys businesses and asks them both how much their costs have risen over the past year and how much they expect them to rise in the year ahead. Here’s the backward-looking measure:
Again, inflation is way down (expected inflation is even lower, just 2.3 percent).
And there’s much more. Fewer small businesses are raising prices. Corporations are mentioning “inflation” much less on earnings calls. And so on.
There’s a legitimate argument over how far we are from the Fed’s target of 2 percent inflation and how hard it will be to get there (or whether we should). But if you insist that inflation hasn’t come way down, the problem isn’t the economy; it’s you.
