How do we know if inflation is really slowing down?
How do we know if inflation is really slowing down?
Thursday was a big day for economic numbers. One of the headliners was the personal consumption expenditures price index, or PCE, the Bureau of Economic Analysis’ measure of inflation. The PCE’s core reading, which removes volatile food and energy, rose 0.2% in October from September.
That number was 0.5% the month before. Is that change enough to convince economists that inflation is cooling?
There’s no single piece of data that gives anyone a perfect understanding of what’s happening with inflation right now. Economists have their favorite indicators, but those favorites can change.
“The initial rise in inflation had a lot to do with the chip shortage that led to car prices spiking, the supply chain problems,” said Laurence Ball, an economist at Johns Hopkins. “Really now, it is a story about the labor market.”
Because it’s still tight. Outside of tech, companies aren’t really laying people off. Jobless claims fell last week to 225,000; that’s near the weekly average in 2019, pre-pandemic. To convince Ball that inflation is slowing, he needs to see unemployment increase.
“I don’t take any pleasure in saying that. High unemployment is not a good thing,” Ball said. But it might be necessary to bring down the cost of labor, which affects the cost of everything.
Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, is keeping an eye on rent. “That is a predictor for what the PCE will do down the road.”
The PCE measures how much people are spending on their current leases. Gagnon is looking at new ones, and those numbers are promising. Zillow data shows rental prices are falling in most major markets.
Betsey Stevenson, an economist at the University of Michigan, is looking at all the data. But she’s also taking a philosophical approach. Like, when will people go into the grocery store and stop saying, “‘Wait a minute. What happened to the price of carrots?'”
She doesn’t think we’re there yet. Even if inflation is slowing, she said we’re nowhere near the finish line. “By the end of 2024 — which sounds like a long way away — we should have inflation under 3%.”
Guess we’ll see you back here in 2024?
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