‘Who you gonna believe, me or your lying eyes?” was a tagline in a now-classic Richard Pryor comedy routine. And if we just substitute “data” for “me,” it turns out to be a pretty accurate description of today’s inflation picture.
The data is that the Consumer Price Index (CPI) rose only 0.2 percent in July.
The rate of price inflation might seem surprising to many consumers, who, to their eyes, seem to be facing price increases everywhere except package deliveries from some online sellers. According to the data from the Bureau of Labor statistics (BLS), though, while the cost of housing went up, prices at major grocery stores were “mixed” — some up, offset by some down — and the energy price index even declined.
The apparent mismatch between the “data” and our “lying eyes” can be explained, at least partially, by comparing the current monthly price movements with the 12-month picture. Prices for both gasoline and fuel oil, for example, climbed 25.4 percent over the past 12 months but dropped 0.6 percent in July.
Gasoline prices are a good example of our perceptions, which are often accurate but have a different time frame. As in past volatility episodes in the global oil markets, our “at the pump” prices go up faster than they go down. This is largely explained by a combination of inventory-based pricing and oligopolistic price behavior. But consumer perceptions aren’t wrong. Drivers, for example, are still paying a lot more for gasoline than they were a year ago.
It takes a long time to change our view of prices, especially when it has been our country’s monetary policy to encourage inflation at 2.0 percent. That means our lying eyes are fully accustomed to rising prices.
If we think we’ve got a “Who you gonna believe” problem, consider what the Federal Reserve is dealing with. It is looking at the data and trying to determine if inflation has built up enough steam to develop its own momentum. If so, the Fed would normally apply the brakes so that the economy didn’t spin out of control.
Unfortunately, the inflation picture isn’t as clear as we might hope, and the reason is that the overall economic picture isn’t perfectly clear, either. While we are all cheered by rising employment, an awakened manufacturing sector, enthusiastic consumer expenditures and expectations, there are enough storm clouds visible to give an economist heartburn.
One of those storm clouds is the trade war. So far, the overall economy has not shown any signs of serious damage from the tariffs, but since they are still new, it is really too early to draw any conclusions about their overall impact.
Generally, trade wars and dueling tariffs tend to have a negative effect on the economic output of all the countries involved. Before we launch a monetary policy on that theory, though, we should know whether the tariffs are a temporary negotiating tactic or a permanent fixture. And since no country, including ours, is about to share that information, monetary authorities like the Fed are left trying to cover both bases — temporary and permanent — and wait out the situation.
Another storm cloud is the twitchiness of the U.S. and global financial markets. They were already apprehensive about the trade wars when the Turkish currency, the lira, began to accelerate its downward plunge, fueled by outsized public debt and political unrest. While a Turkish economic collapse, and the accompanying investor losses, could probably be absorbed by global markets, there is concern about “contagion” — that a general decay of confidence in developing countries’ currencies and financial structures could spread to international financial markets.
The Fed is scheduled to raise short term interest rates by a quarter point (0.25 percent) in September. Normally that small an increase is not likely to derail a healthy economy, but these aren’t normal times. President Donald Trump is telling them not to do so because will short circuit the economy’s growth and recovery.
The Federal Reserve is an independent arm of the government and doesn’t have to take monetary policy advice from a president. On the other hand, members of the Federal Reserve Board are undoubtedly taking into consideration that the president has thus far seemed to have a better read on the economy’s direction than the economists or their economic models.
Given the level of uncertainty in the economic data and in the financial markets, a good guess is that barring a major change in the data or the environment the Fed will probably stick to its announced plan and raise its short-term interest rate target by a quarter point in September. And the economy will let us know if that is just the right move to cool inflation without chilling the recovery.
James McCusker is a Bothell economist, educator and consultant.
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