Paul Krugman: Markets a good indicator of inflation’s direction

Recent price measurements were a little hard to judge, until the markets digested them.

By Paul Krugman / The New York Times

The latest news on inflation has been pretty good. It has also been extremely weird. And that weirdness is, in a way, the message.

With underlying inflation fairly low but probably still above the Fed’s 2% target, and people still worried that it might go back up, quirky measurement issues can lead to big mood swings that are quickly reversed when the next numbers come in — or sometimes even a few hours after the initial announcement, once knowledgeable people have had some time to dig into the details.

There were two big official inflation reports in the past couple of days: the producer price index (what we used to call wholesale prices) on Tuesday and the consumer price index on Wednesday morning. There was also a private survey from the National Federation of Independent Business that may add some clarity.

So what do I mean by “weirdness”? On Tuesday, I was busy most of the day with plumbers and dentists, so I was able to check in on events and commentary only once in a while. But this enforced limitation on the information flow might actually have given me more perspective. The first thing I saw was a hot PPI, with inflation coming in well above expectations. There was much wailing and rending of garments. Then, as the analysts I follow had time to parse the details, they started to declare that this was actually a good report.

Financial markets seemed to agree. One quick and dirty way to judge how markets view inflation data is to look at the yield on two-year U.S. Treasurys, which largely reflects what people think the Fed is going to do. If inflation looks hot, they expect the Fed to keep rates high and maybe even increase them; if it looks cool, they expect the opposite.

And if you look at two-year yields over the past few days, you see the market reaction matching my sense of the commentary. Yields spiked when the PPI report was released, then fell back once there was time to dig into the numbers, ending the day lower than they started.

On the other hand, markets from the get-go liked the CPI, which seemed to show inflation resuming its downward trend, with yields falling sharply. But analysts were still digging into the details. Will they be less optimistic by Wednesday evening? Probably not: Early commentary seems, if anything, to be saying that the numbers were even better than they first appeared. But after Tuesday, I’m going to wait and see.

I also mentioned the survey from the NFIB, which represents small and medium businesses. One question it asks is whether businesses are planning to raise or lower prices over the next three months; the percentage difference from current numbers is often a useful indicator of inflation trends. And that spread is currently close to what it was before the pandemic, although slightly higher.

So my best guess? The acceleration in measured inflation over the past few months was probably a statistical illusion; inflation wasn’t as low as it seemed in late 2023 but probably hasn’t risen much, if at all. Underlying annual inflation is probably around 2.5%, maybe even less. So my guess is that we’ve already won this war — that we have basically achieved a soft landing, with low unemployment and acceptably low inflation.

But I could be wrong, and even if I’m right, it’s going to take at least a few more months of good inflation news before this happy reality sinks in.

This article originally appeared in The New York Times.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Opinion

toon
The City of Everett is set to purchase two single sidewalk restrooms from Romtec, a company based in Roseburg, Ore., for $315,000. (Romtec)
Editorial: Utilitarian but sturdy restrooms should be a relief

Everett is placing four stalls downtown that should be accessible but less prone to problems.

Schwab: What was lost when doctors stopped making house calls

More than just a convenience, a house call could inform a doctor about the patient’s care at home.

Dowd: Biden could take a lesson from Reagan on pace of travel

In his bid to look energetic, the president is jetting around the globe at a clip Nancy Reagan would not approve of.

Krugman: Public’s mood on economy shows a subtle positive shift

It might not provide much help to President Biden, but it may not be as much of a drag on him, either.

Goldberg: Attack on Pride in Colorado further splits the GOP

The state party president, who is running for Congress, is counting on homophobia to secure the base.

Artist Natalie Niblack works amongst her project entitled “33 Birds / Three Degrees” during the setup for Exploring The Edge at Schack Art Center on Sunday, March 19, 2023, in Everett, Washington. The paintings feature motion-activated speakers that play each bird’s unique call. (Ryan Berry / The Herald)
Editorial: For 50 years Schack Art Center there for creation

The art center is more art studio than museum, supporting artists and fostering creativity in kids.

Snohomish School District’s Clayton Lovell plugs in the district’s electric bus after morning routes on Thursday, March 6, 2024, at the district bus depot in Snohomish, Washington. (Ryan Berry / The Herald)
Editorial: Money well spent on switch to electric school buses

With grants awarded to local school districts, a study puts a dollar figure on health, climate savings.

Mangrove trees roots, Rhizophora mangle, above and below the water in the Caribbean sea, Panama, Central America
Editorial: Support local newspapers work to hometowns’ benefit

A writer compares them to mangrove trees, filtering toxins and providing support to their neighbors.

toons
Editorial cartoons for Thursday, June 13

A sketchy look at the news of the day.… Continue reading

Stephens: Only way that Biden can win is not to run

The president can only commit to managing threats; his best chance for victory is to leave the ticket.

Krugman: The wealthy’s support of Trump isn’t just about money

They’re also not crazy about those who — like Biden — don’t pay sufficient deference to them.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.