Positives on the Inflation Report

By at 14 September, 2022, 10:07 am

by Raymond J. Keating –

Confusion too often reigns when it comes to politicians and the media sorting out economic data. But economists regularly contribute to the mix-ups as well. Consider the latest report from the U.S. Bureau of Labor Statistics on the Consumer Price Index (CPI).

When one looks at the straightforward inflation data, the news is positive. Specifically, CPI inflation has nearly disappeared over the past two months now, registering 0.0 percent in July and 0.1 percent in August. (See the following chart from the BLS report.)

Source: U.S. Bureau of Labor Statistics

That’s good news, especially given that inflation has been raging since early 2021.

These past two months don’t wipe out the previous months of inflation.

Again as reported, inflation ran at 8.3 percent over the past 12 months. But when looking at inflation, one ultimately is concerned with what lies ahead. Government reports in what’s been happening on inflation is, as the old saying goes, like trying to drive a car by looking in the rearview mirror. So, we do the best we can, and the more recent the data on inflation, the better.

Nonetheless, there are many media reports out today basically ignoring the past two months, and leading with inflation slowing modestly because the 12-month tally in inflation slowed from 8.5 percent to 8.3 percent. That’s the wrong point as to a main takeaway.

But there’s another measure that has led many observers to say that inflation still raged on in August. That is, CPI less food and energy increased by 0.6 percent in August, which was faster than in July. The problem is that inflation is a measure of the change in the general price level. Inflation is not about price changes among certain products and not others. And whether prices are heading up or down, excluding such vital measures as food and energy is an absurdity.

CPI less food and energy only gains attention because food and energy prices tend to be volatile from month to month. Well, yes, and so what? One gets the idea that some economists look to CPI less food and energy because, well, it’s hard to figure things out when looking at actual inflation.

The bottom line is that inflation has taken a welcome break over the past two months, and let’s hope that this is the start of a much-needed trend. Yes, volatility must be dealt with, especially during periods of high inflation, and that’s part of the reason why inflation generates real-world uncertainty for businesses, investors, workers and consumers.

Unfortunately, uncertainties increase with misguided policymaking. The Fed seems on a mission to crush the economy in the name of fighting inflation, even as we’ve experienced stagflation during the first half of this year. And the White House and Congress are pitching in with wrongheaded tax, regulatory, protectionist and spending measures seemingly designed to make matters worse. Wouldn’t it be nice of policymakers looked at this two-month break in inflation, and seriously thought about how policy could build on this and encourage vital sources of economic growth, such as entrepreneurship, investment and work.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


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