By Richard Vague
We can now officially deem our bout of high inflation to be over. The just-reported CPI increase for May was only 0.12 percent, which is 1.5 percent annualized, and the PPI increase was negative 0.32 percent, or negative 3.8 percent annualized. Both the monthly CPI (consumer prices) and PPI (producer prices) numbers have been moderate to benign for 11 months now.
On a year-over-year basis, the increases in CPI and PPI for May were 4.1 percent and 1.2 percent respectively. When the numbers are reported next month, year-over-year inflation will most likely fall to within the range of 3 to 3.5 percent, simply because the peak increase in June of last year will be the comparison point.
That’s pretty tame, especially given all the rhetoric of concern that continues to surround the issue.
By comparison, note that inflation peaked at 8.9 percent last June, and in the late 1970s and early ‘80s, our only other concerning bout of inflation in the last 50 years, it peaked at 14.6 percent.
In retrospect, here’s what happened. Beginning in April 2021, COVID-based supply chain disruptions took inflation up to 7.8 percent on average over the next ten months. It would likely have begun to abate from there, but in February 2022, the invasion of Ukraine caused the price of oil, wheat, natural gas, and other commodities to skyrocket, and inflation shot up to an average of 10.1 percent over the next five months.
However, by July of 2022, supply chains had been sufficiently righted and the world had somehow adequately adjusted to the disruption of the Ukraine war, and the changes in the monthly CPI and PPI plunged and have remained moderate. Notably, this improvement came at a point when interest rates were only 2 percent—well before the punishing 5 percent level they have now reached.
Reading the headlines, you would not necessarily conclude that high inflation is behind us. You might instead believe that inflation is a still-potent threat that stems from profligacy in money supply growth or government debt growth (two very different things)—and can only be bludgeoned to its death by continued high interest rates. (Some also contend that high inflation has in part come from corporations using supply chain disruptions to mask price increases, and that may be a small part of it since Fed-reported corporate profits in 2022, at 9.3 percent of GDP, were slightly above the 8.9 percent average in the low-inflation period of 2011 through 2019.)
But the economics profession now has a database spanning some 50 to 70 years for 47 countries that together comprise 91 percent of the world’s GDP, so examining these premises is a fairly straightforward proposition. For major developed countries, there is simply not a strong correlation between these factors and inflation. Instead, inflation most often relates to disruption in supplies, as most egregiously occurs during wars—and pandemics. (See our article “Whither Inflation” in these pages from January 2022.)
We’re not completely out of the woods: The Ukraine war would appear to have no end, and all bets could be off if it should flare up significantly.
The June number should show a marked improvement, but it will not be as easy for the economy to post big inflation declines in the months after that. Inflation will likely linger stubbornly somewhere between 3 and 5 percent and be hard pressed to go much higher than that—and if recent PPI trends are a reasonable harbinger, it could well trend even lower over the next year.
In any case, there is certainly no need for the Fed to raise interest rates further—and blissfully, the Fed chose not to raise rates again in its most recent meeting. After all, the current high interest rates will continue to do considerable damage whether the Fed raises them more or not. In my view, there is now a case for beginning to lower rates, though in the Fed’s mind that would be tantamount to letting the inflation genie come leaping back out of the lamp.
For the rest of us, however, it might be time to quietly raise a hopeful glass to the end of this bout of high inflation.