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John Cassidy has been a staff writer at The New Yorker since 1995 and writes extensively on business and politics. We caught up with him this week to discuss the latest inflation figures and other risks to the economy.
Headlines generated by the Consumer Price Index (CPI) for March on Tuesday showed that inflation stood at a high in over 40 years. What does a deeper dive into the numbers tell you? What is particularly scary and is there any good news?
Inflation is a composite number – an index – made up of myriad transactions throughout the economy. It’s only when you start disaggregating the index that you see what’s really going on. The most notable developments over the past month have been the big jumps in energy and food prices, both of which are more or less the result of disruptions from the war in Ukraine. On the negative side, there were also some signs that higher energy prices were leading to price increases in other parts of the economy, including the huge services sector. Take energy-intensive home delivery and laundry/dry cleaning, which have seen double-digit price increases over the past 12 months. On the back of such developments, the CPI as a whole rose 1.2 percent in March, up 8.5 percent in the trailing 12 months. But if you exclude the food and energy components, you find that prices rose 0.3 percent in March, down from February’s 0.5 percent increase. So there was some good news, consistent with the forecast that headline inflation is nearing or has already peaked. Most headlines on Tuesday ignored this aspect, but Wall Street investors did not. The 10-year government bond yield, which reflects longer-term inflation expectations, even declined somewhat.
Economist Larry Summers, who was an early warning of the dangers of inflation – and whose arguments you examined in detail last week – has written that a recession is now likely. How would we get from here to there? What other outcomes are possible?
Rising inflation alone does not cause a recession. In fact, this is often taken as an indication that an economy is growing too fast relative to the supply of labor and other resources. The danger is that rapidly rising prices can prompt policymakers, particularly those in the Federal Reserve, to put the brakes on the economy. Summers points to the danger that if the Fed doesn’t get inflation under control quickly, it could be forced into really drastic measures — that is, really big rate hikes — that would not only slow down the economy, but plummet it a deep recession. That’s what happened in the early 1980s. Fed defenders say it still has a good chance of cooling the economy and lowering inflation without triggering a recession — the scenario known as a soft landing.
Where you stand in this debate largely depends on how you interpret the recent surge in inflation. If you believe that this is largely being caused by pandemic-related disruptions like snafus in the global supply chain, and that things will gradually ease as these issues are resolved – and hopefully the war in Ukraine ends – then you would believe that too the Fed has a good chance of achieving its targets. On the other hand, if you believe that inflation is a product of excessive demand for goods and labor and that it is beginning to become permanent anchors in the economy, you would be skeptical about the Fed’s prospects. So it very much depends on how you interpret the surge in inflation – and that’s what I mainly wrote about in my article.
You’ve written about the story Biden and the Democrats should tell about the jobs numbers, COVID relief legislation and inflation. Is there a politically convincing argument that the economy is doing well despite the pandemic when petrol, food and the like are suddenly so expensive?
From an economic standpoint, Biden is coming off pretty bad. For example, if you look at employment, in the first year and a bit of his presidency, the economy added more jobs than any previous year. The unemployment rate rose from 6.4 percent to 3.6 percent. That’s a big change, and historically one would expect the President to get political credit for it. However, as far as the news is concerned, it is very difficult to divert attention from the inflation spike. The media may be to blame for this, but also because the price increases are visible to almost everyone every day and are therefore very noticeable. Gas prices are the most obvious example. But things like heating costs and food costs, which have risen by almost nine percent over the past twelve months, are also important.
This environment creates a really tricky political challenge. When the White House tries to argue that while rising inflation is a very unwelcome development, there are also many positive developments in the economy, they are accused of falling behind. Therefore, it is now intensely focused on alleviating the inflation problem. The president is doing things like trying to open ports, releasing more oil from the Strategic Petroleum Reserve and announcing on Tuesday he will waive a summer ban on gasoline, which contains more ethanol and is slightly cheaper. It’s not yet clear whether these moves will increase Biden’s approval rating. However, looking at the poll numbers, the decline seems to have stopped. The White House will take solace in the hope that inflation will peak at 8.5 percent.
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Read more from John Cassidy:
Is Larry Summers Really Right About Inflation And Biden?
The Harvard economist has received praise for the warnings he issued early last year, but some government officials and economists question the basis of his arguments.
How should Democrats react to rising inflation and high gas prices?
As halftime approaches, some prominent members of the party are calling for a suspension of the federal gasoline tax and a windfall tax on energy company profits.
Jerome Powell’s dual message on inflation
The Fed has hiked rates for the first time since 2018, but its chairman insists it won’t do any serious damage to the broader economy.
How Vladimir Putin miscalculated the economic cost of invading Ukraine
The Russian leader apparently failed to anticipate the unprecedented attacks on Russia’s central bank, a move that has battered the ruble and rocked the country’s financial system.
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