Biden Says Inflation in July Was Zero. He’s Right. And He’s Wrong.

President Biden is catching flak from Republicans for proclaiming on Wednesday that inflation in July was zero, not 8.5 percent. Both sides have a point. Zero is the change in prices in July from one month earlier, while 8.5 percent is the change in prices from one year earlier.

Which is the better description of the inflation rate? To understand why that question is tricky, even for economists, think about something more familiar: your driving speed.

Sometimes what matters is the instantaneous rate, the speed you’re going right now. If you get pulled over by a police officer for going 60 m.p.h. in a 40 m.p.h. zone, it will do you no good to argue that your average speed since you started your trip was under the limit.

Other times what matters is the average speed over time, such as when you’re estimating how long it will take to get to the beach on Saturday.

In the case of inflation, each measure — the one-month change in prices and the one-year change — has pros and cons. The advantage of the one-month change is that it’s a read on the latest trend, unclouded by what prices were doing last summer, fall, winter or spring. The disadvantage is that monthly price movements are volatile. The price level was flat in July because of big drops in gasoline prices, airfares and a few other segments of the economy. Nobody believes that zero is the new normal for inflation in the United States.

Conversely, the one-year change in prices is less perturbed by short-term fluctuations in prices of individual items. If there’s some underlying momentum to inflation, it will be captured better by the annual change. But the annual change obscures turning points. If inflationary fever is breaking this summer, you won’t easily detect that by looking at a number that reflects price changes over the past year.

Economic theory aside, Biden’s “zero” brag was a political misstep. The public focuses on the level of prices, not just their trend. If prices are high by historical standards, it still feels like inflation to ordinary drivers and shoppers, even if the latest move for prices was down.

Anyway, the more important question about inflation is its future, not its past. This week I attended the annual meeting of the Aspen Economic Strategy Group at the Aspen Institute in Colorado, which concluded with a public program on inflation and growth. Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, told the audience that despite the flat prices in July, the Fed is “far, far, far away from declaring victory” against inflation.

Lawrence Summers, a Harvard economist and former Treasury secretary who blames the Fed for letting inflation get too high, said a recession will probably be necessary to cool off demand sufficiently to get inflation back to the Fed’s target of 2 percent a year. And he said the Fed governors and Fed bank presidents who set monetary policy have failed to acknowledge as much. The median projections for unemployment by members of the Federal Open Market Committee are optimistic: 3.7 percent for the fourth quarter of this year, 3.9 percent for the fourth quarter of next year and 4.1 percent for the fourth quarter of 2024, indicating no expectation of recession.

I think Summers is probably right that raising interest rates enough to force inflation back to just over 2 percent by the end of 2024, as the Fed’s median forecast currently anticipates, probably would induce a recession, and it would be healthy for the Fed to acknowledge as much. But that raises the question of why getting to 2 percent is so urgent. After all, the Fed’s favored inflation gauge was below 2 percent most of the time from 2008 until last year — which was too low by the Fed’s own reckoning.

One reason for the Fed to move aggressively on inflation is that it has proclaimed its 2 percent target forcefully and repeatedly. “Our credibility is now on the line,” Kashkari told the Aspen audience, adding that if the Fed were to say 3 percent is OK, it would mean “you can’t really trust us.” For the Fed to have tied its own hands is a real problem, and it’s one that I hope to write about in a future newsletter.

The Readers Write

Oh, puleeze. The people you wrote about in your July 29 piece are far from living paycheck to paycheck. I get $1,024 per month from Social Security. Thirty percent of that is rent in public housing. Another 30 percent is the premium on my Medicare supplement; I have metastatic cancer, and that’s a bargain, as it gives me no out-of-pocket costs. What’s left is for everything else. Food, bus pass, the most basic internet, the very occasional book or movie rental. No meals out. No clothing — my winter coat is 25 years old. No gifts for my grandchildren. Zip, nada, zilch. That is living paycheck to paycheck.

Suzan Wachs Katzir
Fort Benton, Mont.

Quote of the Day

“Always make new mistakes.”

— Esther Dyson, longtime email tagline

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