Jerome Powell Hails Inflation Drop at Retreat

From the NBER Working Paper "People's Understanding of Inflation," by Alberto Binetti, Francesco Nuzzi & Stefanie Stantcheva.

Here's the link: https://t.co/Dh6FiDXLmj

@nberpub #inflation #economy #nber #ecomtwitter pic.twitter.com/DOL8ysWOi5

— Mohamed A. El-Erian (@elerianm) September 3, 2024

The U.S. economy has managed to bring down inflation significantly without triggering a recession, a surprising achievement celebrated by central bankers at their annual retreat in Jackson Hole. In the rich world, annual price increases have fallen from a peak of about 10% in early 2022 to below 3% today, without causing a severe economic downturn. The Federal Reserve is expected to join central banks in Europe in cutting interest rates soon, as bond yields have fallen sharply since the summer and stock markets have shrugged off a growth scare from earlier this year.

The attached is from @TheEconomist's article on "Why inflation fell without a recession."
The only thing I would clarify is that rather than supply shocks being "rare" in the 1990s, there were a series of favorable ones, internationally and domestically. This imparted a… pic.twitter.com/69vW3YNzcA

— Mohamed A. El-Erian (@elerianm) September 1, 2024

Remarkably, America’s economy was bigger in the second quarter of 2024 than had been forecast before the COVID-19 pandemic struck, suggesting that high interest rates have played a crucial role in restoring price stability. As the Federal Reserve and other central banks navigate their next steps, they must carefully balance maintaining low inflation and encouraging sustainable economic growth. This unexpected achievement in combating inflation without a recession will likely serve as a valuable case study for economists and policymakers in the years to come.

Despite the slowdown in inflation, many consumers continue to face high prices in their everyday shopping.

By paying attention to the MONEY SUPPLY, in 2021, Greenwood & I wrote in the WSJ that inflation would PEAK at 9%/yr. It peaked at 9.1% in June 2022.

We predict that US INFLATION will end the year at 2.5%-3%/yr. It is currently 2.9%/yr & falling.

We will hit the BULLSEYE AGAIN. pic.twitter.com/9dGkpcidpN

— Steve Hanke (@steve_hanke) September 1, 2024

Grocery prices, for example, have risen 25% since 2020, a stark contrast to the 16-year period it previously took for prices to increase the same amount. Keith Albright, marketing insights and analytics manager at Cargill, notes that consumers are still burdened with the “value equation” each time they shop, despite news of stabilizing inflation.

The Consumer Price Index (CPI) has cooled from a 9.1% high in June 2022 to 2.9% in July, but this deceleration in inflation does not necessarily mean cheaper prices.

Powell lauds inflation’s surprising drop

Consumers continue to weigh their spending options carefully, prioritizing some goods over others to maintain their preferred lifestyle.

Grocery prices are expected to stabilize over the next year, with the U.S. Department of Agriculture predicting an overall grocery price increase of 1% this year and less than 1% in 2025. However, consumers may need time to adjust to these new price points. Restaurant prices have surged by 28% since 2020, driven by higher wages and overhead costs, while grocery spending as a share of disposable income has been declining.

Specific grocery items show mixed trends, with some prices slightly dropping but remaining near record highs. The CPI is also influenced by high housing prices due to elevated interest rates, which have impeded new construction and sidelined buyers. The Federal Reserve is expected to make a rate cut, potentially justified by a weakening labor market.

Energy costs present a mixed bag, with natural gas prices decreasing following a mild winter, while electricity costs rise due to infrastructure investments and the shift to renewable energy. Gasoline prices remain volatile, influenced by seasonal and geopolitical factors. Other rising costs include motor vehicle insurance, which has spiked due to increasing repair costs and severe weather damage, and health insurance premiums, partly impacted by higher care costs and increased use of weight-loss drugs.

As inflation rates drop, consumers continue to feel the squeeze of high prices, leading them to make more considered spending decisions in their daily lives.