The inflation scare is over

Put another nail in the coffin of the inflation menace that bedeviled the US and global economy.

July’s CPI inflation report showed core inflation (which excludes volatile food and energy prices) was up 0.165% month-on-month, a little below what economists had anticipated, while the annual rate ticked down to 3.2%.

(The core version of the inflation metric the Federal Reserve prefers, personal consumption expenditures or PCE, is up 2.6% year-on-year as of June).

Monthly core CPI inflation has now come in lower than economists anticipated in its last four readings, the first time that’s happened since 2019. Over a six-month period, core price pressures haven’t been on the softer side this much since before the inflation surge began.

The time to be worried about inflation is when it’s going higher, it’s going higher faster than people expect, people expect it to be or stay above central bank targets for a long time, and the underlying dynamics that could make that happen are in place.

None of the above is applicable to the world we’re living in.

Inflation is decelerating. And not only are we seeing it moderate a little faster than anticipated in the US, but also globally: Citi’s global inflation surprise index (which measures how pricing data comes in versus expectations), has been in negative territory since April 2023 and is back to trending lower after a brief blip higher in the first quarter.

Over the medium term, consumers don’t think inflation will be out of control. In a survey conducted by the New York Fed, Americans’ expectations for inflation in three years’ time sank to its lowest level in survey history (back to 2013).

And with the unemployment rate creeping higher and wage growth decelerating, there isn’t a strong case to be made that we’re on the cusp of a wage-price spiral in which workers have enough bargaining power to demand ever-higher wages to compensate for rising costs (which could then drive selling prices higher as firms adjust to higher labor costs).

Even food prices, which are a part of headline inflation and certainly a highly visible and indispensable line item in household budgets, may be poised to moderate because of robust harvests.

“If the favorable weather persists for a couple more months, the low farm prices we enjoyed from 2015 to 2020 are on the cusp of a return,” writes Javier Blas of Bloomberg Opinion.

When we’re talking about how far inflation is away from a central bank’s target in decimals, rather than percentage points, it’s a clear sign that price pressures are sufficiently well behaved. There’s a reason why a lot of central banks have target ranges for inflation (i.e., between 1 to 3%) – it’s really not reasonable to suggest setting short term interest rates can really fine-tune price growth across the economy to that extreme.