As an economist, I feel called to address inflation in this column.
Rising consumer prices have dominated the headlines of American business and financial news over the past few months and will be of great importance to policy makers, entrepreneurs and voters alike this year.
Inflation is tricky to talk about because it’s concerned with the movement of millions of prices in the world’s largest market economy. Americans tend to want something they can pound the table with in a debate.
The emphasis on rising consumer prices in national news coverage tends to obscure inflation’s other major effect: the falling value of debt. As the prices of goods and services rise, the purchasing power of the dollar falls. When that happens, the value of dollar-denominated debt also falls.
If this seems confusing, don’t feel bad. Many of my macroeconomics students struggle with the concept of the price level. And although it is a relatively simple idea, in practice inflation is notoriously difficult to measure. The Consumer Price Index (CPI) published by the Bureau of Labor Statistics every month is what is usually cited in the press, but the Federal Reserve prefers the Personal Consumption Expenditures (PCE) index calculated by the Bureau of Economic Analysis as a measurement of inflation. Oftentimes economists will look at “core inflation,” which excludes changes in the prices of food and fuel, because those prices tend to be more volatile in the short term. Ironically, when many Americans talk about inflation, they mean rising grocery bills and gas prices. Hence the longstanding disconnect between official discussions and conversations between ordinary Americans on the topic.
It should come as no surprise when the prices of essential goods rise it is disruptive to society, but I think it is unfortunate the conversation seems to exclude some relevant context. For instance, macroeconomist Claudia Sahm points out that, although a mother of nine buying 12 gallons of milk per week may face a considerably higher grocery bill, she also received $2,250 per month from the expanded (but sadly discontinued) 2021 Child Tax Credit, on top of $15,400 in stimulus checks in March. Indeed, much of the debate over what to do about inflation comes back to government spending in response to the COVID pandemic and the associated shutdown of the economy.
In a recent Washington Post opinion piece, JW Mason and Lauren Melodia of the Roosevelt Institute wrote present inflation is the cost of the stimulus measures put in place by both the Trump and Biden administrations. The benefit was avoiding the destructive effects of mass unemployment, which would have been far worse. Without stimulus checks and expanded benefits to parents and the unemployed, the country may well have fallen into a deep, long-lasting recession. Instead, the economy recovered quickly, and we are now able to face economic challenges with firm footing.
And policy makers are indeed beginning to address rising inflation. The Federal Reserve, under the leadership of chairman Jerome Powell, has signaled interest rates will rise in the coming year. This should have the effect of bringing inflation down towards a target rate of 2%, moderating ongoing market price adjustments over time. Given the turbulence of the past couple of years, I think that’s pretty good news.
• Proud papa, loving life partner, and amateur ukelele composer, Samuel Barbour is a local economics professor musing on all things topical, within our community and abroad. Questions and comments are fielded at firstname.lastname@example.org