• Economic Crisis and RecoveryCrisis económica y recuperación
The Washington Post had an interesting piece that looked at the lives of several people who quit low-paying jobs in a restaurant in Arkansas since the pandemic began. There are three interesting points that come out of this story.
The first is the headline item (actually, subhead) that although the quitters’ mental health improved, their finances were not necessarily better after they left their jobs. There is an obvious point here that people should recognize. It is unlikely that, even in a good labor market, people who leave near minimum wage jobs will suddenly find themselves flush with money.
If someone is earning $10 an hour, even a 20 percent increase (in excess of inflation) only gets them to $12 an hour. That sort of increase likely means a big difference in their standard of living, but still leaves them far short of a comfortable middle-class existence. In some cases, the modest gains from the tighter labor market may give them the ability to get additional education or training that will let them enter a higher paying occupation, but we shouldn’t expect that a tight labor market alone will mean that workers in the lowest paying jobs are now financially secure.
There is an important qualification to the stories of the people discussed in this article. The piece starts with the early days of the pandemic when the restaurant was losing business due to the shutdowns. In 2020, we did not have a tight labor market. Instead, we had very high unemployment.
It has only been in the last half-year that we could say that workers were getting the upper hand and had their choice of jobs. The picture for these workers might look qualitatively better if they were quitting jobs today, and the labor market remains tight.
The second point is that the article portrays the restaurant owners as very sympathetic people. The restaurant is owned by a young couple who are pursuing a dream. They work hard alongside their staff, struggling to keep the restaurant open. While some of the former employees (the restaurant closed) may disagree with the article’s portrayal, the reality is that many low-wage employers are not assholes. They are struggling to make a business work, and that can mean that they can’t afford to pay decent wages to their workers. Of course, this story does not apply to the Walmarts and the McDonalds of the world.
The third point is that the restaurant closed. This means that no one is working there. That is the story of how whatever labor “shortage” we are now seeing gets resolved. Businesses that cannot afford to pay workers the prevailing wage go out of business. In many cases, this may not be pretty. Business owners, like the couple in this story, see their dreams shattered. But that is the way a market economy works.
When uncompetitive businesses shut down, their workers look for employment elsewhere. This process will bring the demand and the supply of workers more into balance. The closing of the restaurant described in the Post article is part of this story.
The Washington Post had an interesting piece that looked at the lives of several people who quit low-paying jobs in a restaurant in Arkansas since the pandemic began. There are three interesting points that come out of this story.
The first is the headline item (actually, subhead) that although the quitters’ mental health improved, their finances were not necessarily better after they left their jobs. There is an obvious point here that people should recognize. It is unlikely that, even in a good labor market, people who leave near minimum wage jobs will suddenly find themselves flush with money.
If someone is earning $10 an hour, even a 20 percent increase (in excess of inflation) only gets them to $12 an hour. That sort of increase likely means a big difference in their standard of living, but still leaves them far short of a comfortable middle-class existence. In some cases, the modest gains from the tighter labor market may give them the ability to get additional education or training that will let them enter a higher paying occupation, but we shouldn’t expect that a tight labor market alone will mean that workers in the lowest paying jobs are now financially secure.
There is an important qualification to the stories of the people discussed in this article. The piece starts with the early days of the pandemic when the restaurant was losing business due to the shutdowns. In 2020, we did not have a tight labor market. Instead, we had very high unemployment.
It has only been in the last half-year that we could say that workers were getting the upper hand and had their choice of jobs. The picture for these workers might look qualitatively better if they were quitting jobs today, and the labor market remains tight.
The second point is that the article portrays the restaurant owners as very sympathetic people. The restaurant is owned by a young couple who are pursuing a dream. They work hard alongside their staff, struggling to keep the restaurant open. While some of the former employees (the restaurant closed) may disagree with the article’s portrayal, the reality is that many low-wage employers are not assholes. They are struggling to make a business work, and that can mean that they can’t afford to pay decent wages to their workers. Of course, this story does not apply to the Walmarts and the McDonalds of the world.
The third point is that the restaurant closed. This means that no one is working there. That is the story of how whatever labor “shortage” we are now seeing gets resolved. Businesses that cannot afford to pay workers the prevailing wage go out of business. In many cases, this may not be pretty. Business owners, like the couple in this story, see their dreams shattered. But that is the way a market economy works.
When uncompetitive businesses shut down, their workers look for employment elsewhere. This process will bring the demand and the supply of workers more into balance. The closing of the restaurant described in the Post article is part of this story.
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• Economic Crisis and RecoveryCrisis económica y recuperación
November retail sales were reported yesterday as increasing by 0.3 percent from the October level. This was considerably lower than expected and (predictably) reported as bad news for Biden. But for those of us who don’t get paid to tell people how everything is bad news for Biden, there is actually a very interesting story in the November data.
First, it is important to recognize that the November 0.3 percent growth number follows an extraordinarily rapid 1.8 percent growth number (revised up from 1.7 percent) reported for October. Retail sales data have a large amount of error, so it is entirely possible that the October figure was overstated by 0.4-0.6 percentage points, which would mean that the November growth figure was understated by the same amount. In any case, the November retail sales figure is 2.1 percent higher than the September number, which is strong growth in anyone’s book.
But there is another aspect to this story that has been almost completely overlooked by the media. One of the issues in the debate over whether inflation would be transitory or persistent is whether people would be spending the money they banked during the recession. This money includes the various pandemic payments ($1,200 per person in 2020 and $2,000 per person this year), as well as the money saved from not going to restaurants and movies, or taking vacations.
The folks arguing that inflation would be persistent have insisted that people would spend this money once the economy opened up more. The transitory folks have argued that much of this money would be saved, meaning that we have less reason to fear excess demand pushing inflation higher.
Thus far, the data have supported the transitory argument. The saving rate for October, the most recent month for which data are available, was 7.3 percent. This is just about the average for the three years prior to the pandemic. If people are spending the money banked in the pandemic, we should expect the saving rate to be far below its pre-pandemic level.
The weaker than expected retail sales number for November means that the relatively high savings rate is continuing. In other words, people are still not spending the money banked in the pandemic. This means that we have less reason to fear excess demand driving inflation.
Given how inflation-obsessed the media has been in recent months, it is sort of amazing that this point has largely been missed in discussing the November data. I will add my usual caveats. This is just one month’s data and there is considerable measurement error in the series, but based on what we saw yesterday, Team Transitory scored a big point.
One last item: the weaker than expected November sales were not in any obvious way connected to the spread of the pandemic. Restaurant sales were 1.0 percent higher in November than October and 37.4 percent above their year-ago level. If fear of the pandemic is not having a huge impact on restaurants, it is hard to believe that it is affecting many other sectors in a big way.
November retail sales were reported yesterday as increasing by 0.3 percent from the October level. This was considerably lower than expected and (predictably) reported as bad news for Biden. But for those of us who don’t get paid to tell people how everything is bad news for Biden, there is actually a very interesting story in the November data.
First, it is important to recognize that the November 0.3 percent growth number follows an extraordinarily rapid 1.8 percent growth number (revised up from 1.7 percent) reported for October. Retail sales data have a large amount of error, so it is entirely possible that the October figure was overstated by 0.4-0.6 percentage points, which would mean that the November growth figure was understated by the same amount. In any case, the November retail sales figure is 2.1 percent higher than the September number, which is strong growth in anyone’s book.
But there is another aspect to this story that has been almost completely overlooked by the media. One of the issues in the debate over whether inflation would be transitory or persistent is whether people would be spending the money they banked during the recession. This money includes the various pandemic payments ($1,200 per person in 2020 and $2,000 per person this year), as well as the money saved from not going to restaurants and movies, or taking vacations.
The folks arguing that inflation would be persistent have insisted that people would spend this money once the economy opened up more. The transitory folks have argued that much of this money would be saved, meaning that we have less reason to fear excess demand pushing inflation higher.
Thus far, the data have supported the transitory argument. The saving rate for October, the most recent month for which data are available, was 7.3 percent. This is just about the average for the three years prior to the pandemic. If people are spending the money banked in the pandemic, we should expect the saving rate to be far below its pre-pandemic level.
The weaker than expected retail sales number for November means that the relatively high savings rate is continuing. In other words, people are still not spending the money banked in the pandemic. This means that we have less reason to fear excess demand driving inflation.
Given how inflation-obsessed the media has been in recent months, it is sort of amazing that this point has largely been missed in discussing the November data. I will add my usual caveats. This is just one month’s data and there is considerable measurement error in the series, but based on what we saw yesterday, Team Transitory scored a big point.
One last item: the weaker than expected November sales were not in any obvious way connected to the spread of the pandemic. Restaurant sales were 1.0 percent higher in November than October and 37.4 percent above their year-ago level. If fear of the pandemic is not having a huge impact on restaurants, it is hard to believe that it is affecting many other sectors in a big way.
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• Economic Crisis and RecoveryCrisis económica y recuperación
Many people may remember University of Chicago economist Casey Mulligan for his argument that unemployment in the Great Recession was caused largely by generous food stamp benefits. Well, he’s back, and telling us that the childcare provisions in President Biden’s Build Back Better (BBB) plan could raise the cost of childcare by $27,000 a year.
Mulligan’s basic story is that by raising pay for childcare workers, BBB will make childcare more expensive. While the plan includes generous subsidies for most families with children, Mulligan argues that families with incomes about the cutoff for subsidies will be paying much more for childcare. He predicts fewer parents will be working and that in some cases families will break up as a result of the bill.
Interestingly, Mulligan’s model is the Affordable Care Act (ACA). He tells us that the ACA hugely increased the cost of health care insurance.
What’s interesting about this example is that health care costs actually increased far less than was projected at the time the ACA was debated and passed. In 2009, the Centers for Medicare and Medicaid Services projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget.
The health care savings of $700 billion in 2019 are more than three times the size of the latest plans for President Biden’s Build Back Better proposal. The extent to which the ACA was responsible for the reduction in health care costs can be argued, but the fact that costs came in far lower than projected cannot be disputed. This means that if Mulligan wants to hold up the ACA as a horror story to be averted with an expansion of government support for childcare, he has a real uphill battle.
What Mulligan can say is that some people do pay more for health care insurance. Before the ACA, people in good health could sign up with insurers that excluded people with health issues, like heart conditions or cancer survivors.
Getting into a pool with only healthy people meant lower-cost insurance. However, it also meant that people with serious health conditions either paid huge premiums or were prevented from getting insurance altogether.
The ACA was about changing this situation. Some healthy people were certainly losers in this story, although the subsidies in the program, which were made more generous by Biden’s recovery package, ensured that low- and middle-income families were largely protected.
We’re looking at a similar story with the childcare provisions in the BBB. Mulligan is right, there could be some losers. But tens of millions of families with children will have better access to quality childcare. I suspect most parents will be fine with this situation.
Many people may remember University of Chicago economist Casey Mulligan for his argument that unemployment in the Great Recession was caused largely by generous food stamp benefits. Well, he’s back, and telling us that the childcare provisions in President Biden’s Build Back Better (BBB) plan could raise the cost of childcare by $27,000 a year.
Mulligan’s basic story is that by raising pay for childcare workers, BBB will make childcare more expensive. While the plan includes generous subsidies for most families with children, Mulligan argues that families with incomes about the cutoff for subsidies will be paying much more for childcare. He predicts fewer parents will be working and that in some cases families will break up as a result of the bill.
Interestingly, Mulligan’s model is the Affordable Care Act (ACA). He tells us that the ACA hugely increased the cost of health care insurance.
What’s interesting about this example is that health care costs actually increased far less than was projected at the time the ACA was debated and passed. In 2009, the Centers for Medicare and Medicaid Services projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget.
The health care savings of $700 billion in 2019 are more than three times the size of the latest plans for President Biden’s Build Back Better proposal. The extent to which the ACA was responsible for the reduction in health care costs can be argued, but the fact that costs came in far lower than projected cannot be disputed. This means that if Mulligan wants to hold up the ACA as a horror story to be averted with an expansion of government support for childcare, he has a real uphill battle.
What Mulligan can say is that some people do pay more for health care insurance. Before the ACA, people in good health could sign up with insurers that excluded people with health issues, like heart conditions or cancer survivors.
Getting into a pool with only healthy people meant lower-cost insurance. However, it also meant that people with serious health conditions either paid huge premiums or were prevented from getting insurance altogether.
The ACA was about changing this situation. Some healthy people were certainly losers in this story, although the subsidies in the program, which were made more generous by Biden’s recovery package, ensured that low- and middle-income families were largely protected.
We’re looking at a similar story with the childcare provisions in the BBB. Mulligan is right, there could be some losers. But tens of millions of families with children will have better access to quality childcare. I suspect most parents will be fine with this situation.
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• Economic Crisis and RecoveryCrisis económica y recuperación
I’m not worried at this point about a deflationary spiral, but I see what, to my view, is a plausible scenario where the CPI actually goes negative in the next twelve months. I go through the categories and my predictions component by component below, but there are four main items driving the story that I’ll mention here.
First, I assume a sharp reversal in new and used car prices. The 11.1 percent increase in the former and 31.4 percent increase in the latter, have added 1.5 percentage points to the inflation rate over the last year. This run-up is due to the well-known shortage of semiconductors. It seems that manufacturers are overcoming this shortage and getting up to normal production levels. This may lead to a situation where they are not only meeting normal demand, but actually could be overproducing and needing to markdown prices.
A second big assumption is a sharp moderation in food prices. The price of store-bought food has risen by 6.4 percent over the last year, adding 0.5 percentage points to the inflation rate (food bought at restaurants added another 0.4 percentage points). This has been driven by a huge surge in demand, where we seem to be eating more of everything. We also see supply chain problems raising shipping costs.
I am betting on the surge in demand easing somewhat and the supply chain problems being resolved over the course of the year. In the past, sharp run-ups in food prices have been followed by declines or periods of very slow growth. I’m betting on the latter.
My third assumption is a sharp reduction in gas and other energy prices, reversing some of the recent run-ups. Gas prices increased 58.1 percent in the last year, adding 2.4 percentage points to the inflation rate.
I assume a partial reversal of this run-up, with a drop in gas prices simply reflecting the recent drop in world oil prices. That would imply an 18 percent decline in prices from the November level, knocking 0.8 percentage points off of the inflation rate for the next twelve months.
Finally, I assume that the prices of many other items, where we have seen a sharp run-up due to supply chain issues, such as appliances and furniture, will level off in the next year as these problems get resolved.
My model here is televisions. The index for televisions had been falling for decades, but it surged by 10.2 percent from March to August (a 26.3 percent annual rate). Since August, the index for televisions has fallen sharply in the last three months, dropping by more than 4.0 percent. I expect that we will see a similar story with many other items in the year ahead. This reversal may come soon if it turns out that many stores over-ordered for the holiday shopping season.
Before going into the item-by-item assessment, I’ll add a point that is worth repeating. The bond markets seem to agree with the view that the inflation we have been seeing is temporary. The interest rate on a 10-year Treasury bond on Friday was under 1.5 percent. That put the breakeven inflation rate for an inflation-indexed bond and the conventional 10-year bond at less than 2.5 percent. (If we allow for the 0.2-0.4 percentage point difference between CPI inflation and inflation as measured by the personal consumption expenditure deflator, this is pretty much in line with the Fed’s 2.0 percent target.) Obviously, investors in the bond market are not expecting anything like 6.8 percent inflation to persist or even 4-5 percent inflation.
This should be somewhat reassuring, but as someone who was warning about both the stock bubble in the 1990s and the housing bubble in the 2000s, I know financial markets can be wrong. But it is still worth paying some attention to what people with money on the line are doing.
Inflation: November 2021 to November 2022
I can’t claim to have a crystal ball that tells me what inflation in the different components will be over the next year, but there is some basis for making reasonable guesses. So here is my story. I welcome corrections/additions by people who are more knowledgeable about specific areas.[1]
| Projected | Contribution | |||||||
| Inflation | Inflation | of | ||||||
| (weights) | Nov 20-Nov 21 | Nov 21-Nov 22 | Component | |||||
| All items | 100 | 6.8 | -0.54 | |||||
| Core | 78.536 | 4.9 | 0.43 | |||||
| Food at home | 7.733 | 6.4 | 1 | 0.08 | ||||
| Food away from home | 6.262 | 5.8 | 2 | 0.13 | ||||
| Energy commodities | 4.207 | 57.5 | -18 | -0.76 | ||||
| Energy services | 3.262 | 10.7 | -10 | -0.33 | ||||
| New vehicles | 3.856 | 11.1 | -11 | -0.42 | ||||
| Used cars and trucks | 3.35 | 31.4 | -33.5 | -1.12 | ||||
| Motor vehicle parts and equipment | 0.401 | 10.2 | -1 | 0.00 | ||||
| Motor vehicle maintenance and repair(1) | 1.085 | 4.9 | 4 | 0.04 | ||||
| Motor vehicle insurance | 1.557 | 5.7 | 0.5 | 0.01 | ||||
| Airline fares | 0.596 | -3.7 | 20.1 | 0.12 | ||||
| Other Transportation services | 1.774 | 0 | 0.00 | |||||
| Alcoholic beverages | 0.997 | 1.9 | 1.9 | 0.02 | ||||
| Tobacco and smoking products | 0.615 | 8.9 | 3.9 | 0.02 | ||||
| Shelter | 32.425 | 3.8 | 3.5 | 1.13 | ||||
| Household furnishings and supplies | 3.774 | 6 | 0 | 0.00 | ||||
| Household operations | 0.89 | 8.4 | 5.5 | 0.05 | ||||
| Water and sewer and trash collection services | 1.074 | 3.5 | 3.5 | 0.04 | ||||
| Apparel | 2.725 | 5 | 0 | 0.00 | ||||
| Recreation commodities | 1.961 | 3.9 | -2.5 | -0.05 | ||||
| Recreation services | 3.703 | 2.8 | 3.5 | 0.13 | ||||
| Medical care commodities | 1.493 | 0.2 | 0.5 | 0.01 | ||||
| Medical care services | 7.002 | 2.1 | 3 | 0.21 | ||||
| Education and communication commodities | 0.48 | 0.9 | -3.6 | -0.02 | ||||
| Education and communication services | 6.043 | 1.7 | 1.7 | 0.10 | ||||
| Personal care products | 0.643 | -0.2 | -0.2 | 0.00 | ||||
| Miscellaneous personal goods | 0.195 | 6 | -1 | 0.00 | ||||
| Other personal services | 1.632 | 4.5 | 4.5 | 0.07 | ||||
Source: Bureau of Labor Statistics and author’s calculations.
Gasoline and Other Energy
Higher gas prices have featured front and center in the story of runaway inflation impoverishing the masses. The good news here is that we can be pretty certain that prices will decline. The price of oil fell to ridiculously low levels in the pandemic (futures prices were actually negative). They then soared to more than $83 a barrel at the start of November as the economy reopened. They have since fallen back to $71 a barrel.
The surge in oil prices led to a huge jump in gasoline prices, which were up 58.1 percent over the last year. I’m betting on an 18.0 percent decline over the next year. This is simply taking where the CPI gas index was back in October of 2018 when the price of oil was roughly at its current level.
I don’t know whether oil prices will go higher or lower from today forward, but there is a good reason to expect the general direction will be downward. We know Biden and the Democrats are doing horrible things to the fossil fuel industry (imposing environmental regulations and restricting where they can drill) but the reality is that demand for fossil fuels is likely to be falling over the next decade.
Electric car sales are growing rapidly here and around the world. Tesla alone projects that it will be selling more than 20 million cars a year by 2030, a number that is almost 20 percent larger than the current U.S. car market. Take that with the appropriate amount of salt, but it seems likely that in the not distant future, most of the cars being sold will be electric.
As this switch takes place, the demand and price of fossil fuels are likely to fall. When producers look out to this future, many are likely to make the bet that it is better to get something for their oil today than risk having it still in the ground twenty or thirty years from now when there may be very little demand. This logic is likely to be especially important for big OPEC producers, like Saudi Arabia, that have very low marginal costs for bringing oil to the market.
Anyhow, that prediction on oil prices is obviously very speculative, but I’ll just put down my -18.0 percent for gas based on the current price. I’m applying this figure to the larger category of energy commodities, since this is mostly gas and the other items have closely tracked gas prices.
For energy services, I’m putting in a projection of a 10.0 percent price decline, largely reversing a 13.3 percent increase since the start of the pandemic. Higher natural gas prices were clearly a big factor in this run-up, and natural gas prices have also been falling sharply in recent weeks. The pattern over the last dozen years has been that sharp increases in this category were quickly followed by sharp declines. The index for energy services was just about 5.0 percent higher before the pandemic than it was a decade earlier.
Food
I can’t say I have a good idea where food prices are going, primarily because I don’t really know what has caused them to go up so much, 6.4 percent over the last year for the food at home category. There is the obvious point that we seem to be eating a lot more food, but the question is why. Purchases of food for home consumption were 11.1 percent higher (adjusted for inflation) in the third quarter of 2021 than in the fourth quarter of 2019. By contrast, food purchases were just 2.8 percent higher in the fourth quarter of 2019 than they had been seven quarters earlier.
Part of this story is that people were buying less food at restaurants, but by the third quarter we were almost back to our pre-pandemic levels of restaurant sales, and by now we are above them, although somewhat below trend. So, are we really eating that much more food than before the pandemic and will that pattern continue?
And, just to be clear, we see the increase in every category. Real purchases of cereal and bakery products are up 14.4 percent, meat consumption 6.4 percent, dairy products 11.7 percent, with consumption of fruits and vegetables rising by the same amount.
I have no idea as to whether people will keep buying so much more food, but it doesn’t seem like a healthy development. Anyhow, for the path of inflation, I’m just going to assume that it follows past patterns. Where we have seen sharp price increases, they have generally been reversed or at least followed by periods of slow price growth.
Food prices rose by 6.6 percent from December 2007 to December 2008. They then fell by 2.4 percent the following year. They rose 6.0 percent from December 2010 to 2011, then rose just 1.3 percent the following year. In the decade before the pandemic began, they rose an average of 1.3 percent annually. After their 6.1 percent rise last year, I’ll put down a 1.0 percent increase over the next twelve months.
Restaurant prices have generally risen by about a percentage point more than food prices, presumably reflecting rising higher labor costs. The opposite has been true over the last year, with restaurant prices going up 5.8 percent, but I’ll assume this pattern resumes over the next year. I’ll put down 2.0 percent for the projected increase in restaurant prices.
Cars and Trucks
New and used cars have been an enormous factor in the inflation we have seen over the last year. Used vehicle prices rose by 31.4 percent and contributed 1.1 percentage points to the inflation rate over the last year. New vehicle prices rose by 11.1 percent and added 0.4 percentage points to the inflation rate.
The reason for these extraordinary price increases is hardly a secret, a fire in a major semiconductor factory in Japan has led to a worldwide shortage of semiconductors. This has led to major reductions in auto production in factories around the world.
While there is still a shortage of semiconductors, several major manufacturers report being back up to capacity. It is reasonable to expect that most factories will be running near capacity within a few months and the auto market will be close to normal by November of next year.
New vehicle prices are up 12.6 percent since the pandemic began. In the seven years from February 2013 to February 2020, they increased by a total of just over 1.0 percent. I’m going to assume that in the next year prices will return to something like their former path. I’m putting down a price drop of 11.0 percent.
Used vehicle prices are up 33.5 percent since the pandemic began. The used vehicle index had actually been falling in the years prior to the pandemic. I will assume that the increase since the pandemic began is reversed over the next year.
Motor Vehicle Equipment and Parts
Prices in this component rose 10.4 percent in the last year after rising less than 1.0 percent annually over the decade prior to the pandemic. This reflects both supply chain issues and also the increased demand for parts as people sought to improve used cars for sale or their own use.
With car production returning to normal, and supply chain issues coming under control, I expect some of this rise to be reversed. I am putting down -1.0 percent for the next year.
Motor Vehicle Repair and Maintenance
Inflation in this component rose to 4.9 percent over the last year, up from 3.5 percent over the prior year. Some of this is undoubtedly due to supply chain disruptions associated with reopening, as well as higher labor costs. I’m assuming that inflation in this component will fall back to 4.0 percent in the next year.
Car Insurance
The index for car insurance had been rising rapidly early in the last decade, but slowed sharply in the years just before the pandemic. In the two years prior to the pandemic, it increased by an average of 0.5 percent. It then fell sharply in the pandemic only to then rise rapidly as the economy reopened, going up 5.7 percent over the last year.
It is important to recognize that the CPI uses a gross measure for auto insurance, counting premiums rather than administrative costs and profits, as it does with health insurance. The sharp rises earlier in the last decade were mostly due to higher payouts. If payments for damages and medical expenses are under control, then the rise in premiums is likely to be limited. I assume that the rise in the next year will be 0.5 percent.
Airline Fares
Airfares plummeted at the start of the pandemic. They have recovered to some extent, but they are still 20.1 percent below their pre-pandemic level. Assuming that the pandemic is under control, it is likely that fares will recover to their pre-pandemic level. I’m putting in a 20.1 percent increase in airfares over the next year.
Other Transportation Services
This is a hodgepodge that includes inner-city and intercity bus travel, state licensing fees, and car rentals. I’m putting down a prediction of no change based on the fact that I expect the 37.2 percent increase in car rental prices to be largely reversed in the next year. This component comprises almost exactly 10 percent of the whole category, so a sharp decline in rental car price should be sufficient to offset increases in the other components.
Alcohol and Tobacco
The index for alcoholic beverages rose 1.9 percent over the last year. This is pretty much in line with its average over the prior five years. I will put down 1.9 percent for next year.
Tobacco prices are driven largely by state and local taxes on tobacco. In the last year, they rose by 8.9 percent. This is considerably more rapid than the 3.9 percent average increase over the prior decade. I am assuming that the rate of increase slows to its prior average.
Rent and Shelter
The two rental components of the CPI, rent proper and owners’ equivalent rent (OER) for owner-occupied housing, are huge factors in determining inflation. Together they account for 31.1 percent of the overall index and 39.6 percent of the core CPI.
The rate of rental inflation slowed in 2020, but has accelerated as the economy reopened. The rent proper index has risen 3.0 percent over the last year, while the OER index has risen by 3.5 percent.
We have seen an interesting pattern develop since the pandemic began. Rents in high-priced areas are showing lower growth, while low-priced areas are seeing rapid rises. In the New York City metropolitan area, rents rose by 0.1 percent over the last year. In San Francisco, they fell by 0.5 percent. In Boston, rents are up 1.1 percent, and in DC by 0.2 percent. By contrast, Detroit rents were up 5.8 percent, in Atlanta 7.5 percent, and St. Louis 4.8 percent.
My guess is that this divergence continues, as workers with increased opportunities to work from home move to lower-priced parts of the country. That’s likely good news for most of the country – more affordable housing in expensive cities and a boost to growth in cities that had been previously left behind – but it’s not clear how it affects overall rental inflation.
One positive is that the rise in house prices during the pandemic, coupled with extraordinarily low interest rates, has led to a boom in housing construction. We’re on a path to having almost 1.8 million housing starts in 2021, up from less than 1.4 million in 2019. This is a positive development, but in a country with over 140 million housing units, an additional 400,000 is not going to have much impact on rents.
I will assume that both indexes return to roughly their pre-pandemic rates of inflation. I’m putting in 3.5 percent as my projection of inflation. This category also includes hotels. That index is currently 8.9 percent above its pre-pandemic level. This component accounts for less than 3.0 percent of the shelter index. I don’t expect that it will diverge enough from the 3.5 percent figure I’m putting down for rent to substantially alter the shelter projection.
Household Furnishings and Supplies
This component had a big spike in inflation in the last year, rising by 6.0 percent last year after having an average increase of less than 0.5 percent over the five years prior to the pandemic. This is the supply chain story. Many of the items in this category are imported, and even domestically produced items are tied up in transit. (It includes appliances.) As supply chain problems ease, there should be some price reversal. I expect that we will see prices in this category be roughly flat in the next year. I’m putting down no change.
Household Operations
This is a category that includes items like gardening and domestic workers. The index for “domestic services” rose 10.2 percent over the last year. (This is probably one reason why we are hearing so much about inflation in the media.) Overall, the index for household operations rose by 8.4 percent over the last year, presumably reflecting higher pay for workers in this sector.
It is likely that low-paid workers will continue to receive substantial pay increases in the year ahead. I’m putting down 5.5 percent for this category.
Water and Sewer and Trash Collection Services
Prices in this category rose by 3.5 percent last year. This likely reflects higher wages for many workers. We are likely to see increases of roughly the same size in the year ahead. I’m putting down 3.5 percent.
Apparel
Apparel prices rose by 5.0 percent last year, after falling by 5.1 percent in the prior year. The general direction for apparel prices has been downward, with the February 2020 index about 4.0 percent lower than its level from five years earlier. I will assume the index stays flat, although the sharp rise in the dollar over the last year would be a factor that should lower apparel prices.
Recreation Commodities
This category includes many items caught up in the supply chain. My favorite example is televisions. As noted earlier, the index for televisions had been falling for decades, but then rose 10.2 percent from March to August (a 26.3 percent annual rate). They have fallen sharply the last three months, although are not yet back to their March level.
The index for this category as a whole had been falling consistently for the decade prior to the pandemic at more than a 2.0 percent annual rate. It rose 3.9 percent in the last year. I expect the prior trend to return. Prices should fall by roughly 2.5 percent in the next year.
Recreation Services
Inflation in this category has been very contained, in large part because the pandemic has hugely depressed demand. The index rose by just 2.7 percent over the last year, roughly the average increase over the prior five years. It is reasonable to expect some pick-up in this measure over the next year, both because demand will increase as pandemic fears ease, and because many of the low-paid workers in the sector will get higher wages. I’m putting down 3.5 percent.
Medical Care Commodities
This category is primarily prescription drugs. After rising rapidly earlier in the century, it has slowed sharply in recent years. The index rose by just 0.2 percent over the last year. This likely had more to do with political pressures than the pandemic.
Medical Services
Inflation in medical services has been very limited in the last year, with the index rising just 2.1 percent. This is a sharp slowing from its immediate pre-pandemic pace (it had risen 5.5 percent in the prior year), but from 2015 to 2020, it had risen by an average of just 3.4 percent.
There are factors pushing inflation in medical service prices in both directions going forward. On the one hand, many people put off care during the pandemic and will likely be making appointments when they feel more comfortable going to a medical facility. On the other hand, to be somewhat morbid, many of the people who were most in need of services died during the pandemic.
There is also the spread of telemedicine, which was far more widely adopted as a result of the pandemic. This should help to put downward pressure on prices. It is also likely that there will be considerable political pressure from the Biden administration and Congress to contain costs.
I am going to assume that, on net, this leaves us with a somewhat lower rate of inflation in health care services than we saw the prior five pre-pandemic years. I’m putting down 3.0 percent.
It is important to realize that most of the growth in prescription drug prices is not captured in the CPI index, since it only measures the prices of drugs currently on the market. If a new drug comes out carrying a price of $55,000 for a year’s dosage (like Aduhelm, the new Alzheimer’s drug), it does not affect the CPI. However, if the price declines in years down the road, due to new competition or going off-patent, this drop will show up in the index.
I will assume that this index rises by 0.5 percent over the next year.
Education and Communication Commodities
This includes a variety of items such as textbooks, computers, and smartphones. The index rose 0.9 percent last year, after falling at an average annual rate of 3.6 percent over the prior decade. I am assuming that this rate of decline resumes in the next year. I’m putting down -3.6 percent.
Education and Communication Services
This component combines college tuition and child care with telephone and Internet service. The former categories have seen modest price increases in the years before the pandemic, while communication services have generally been declining in price. College tuition growth is likely to be restrained in the near future as many schools will still rely to a large extent on remote learning and feel a need to restrain tuition increases. Phone and Internet providers may also feel some need to restrain price increases in response to political pressure.
Inflation in this component was 1.7 percent over the last year. I have assumed that it will be 1.7 percent again in the year going forward.
Personal Care Products
This category includes items like shaving cream, toothpaste, and shampoo. The index fell by 0.2 percent last year, roughly in line with past patterns. I will put down a decline of 0.2 percent for the next year.
Other Personal Services
This category includes a wide range of items like haircuts, legal services, and tax preparation. It rose by 4.5 percent last year, up from an average close to 2.5 percent in prior years. This presumably reflects more rapid pay growth for many of the lower-paid workers in this category. I am putting down 4.5 percent for next year.
Miscellaneous Personal Goods
I don’t know what these are. The index rose by 6.0 percent last year. Prices had been falling by an average of a bit more than 1.0 percent annually in the decade before the pandemic. I will assume that the rise last year was due to supply chain problems and that the decline will resume next year. I’m putting down -1.0 percent for this category.
Are We Good on Inflation?
I tried to use a critical eye in putting down these numbers. Some, like gas prices, clearly have a more solid foundation than others. I’m sure someone could justify different and higher numbers in each category, but these are my best guesses with the information I have. I welcome comments and criticisms.
[1] Careful observers will note that my weights only add up to 99.735. (They are actually “relative importance,” but we’ll leave that for another day.) I’m obviously missing some component that has a weight of 0.265 in the index. Suggestions welcome.
I’m not worried at this point about a deflationary spiral, but I see what, to my view, is a plausible scenario where the CPI actually goes negative in the next twelve months. I go through the categories and my predictions component by component below, but there are four main items driving the story that I’ll mention here.
First, I assume a sharp reversal in new and used car prices. The 11.1 percent increase in the former and 31.4 percent increase in the latter, have added 1.5 percentage points to the inflation rate over the last year. This run-up is due to the well-known shortage of semiconductors. It seems that manufacturers are overcoming this shortage and getting up to normal production levels. This may lead to a situation where they are not only meeting normal demand, but actually could be overproducing and needing to markdown prices.
A second big assumption is a sharp moderation in food prices. The price of store-bought food has risen by 6.4 percent over the last year, adding 0.5 percentage points to the inflation rate (food bought at restaurants added another 0.4 percentage points). This has been driven by a huge surge in demand, where we seem to be eating more of everything. We also see supply chain problems raising shipping costs.
I am betting on the surge in demand easing somewhat and the supply chain problems being resolved over the course of the year. In the past, sharp run-ups in food prices have been followed by declines or periods of very slow growth. I’m betting on the latter.
My third assumption is a sharp reduction in gas and other energy prices, reversing some of the recent run-ups. Gas prices increased 58.1 percent in the last year, adding 2.4 percentage points to the inflation rate.
I assume a partial reversal of this run-up, with a drop in gas prices simply reflecting the recent drop in world oil prices. That would imply an 18 percent decline in prices from the November level, knocking 0.8 percentage points off of the inflation rate for the next twelve months.
Finally, I assume that the prices of many other items, where we have seen a sharp run-up due to supply chain issues, such as appliances and furniture, will level off in the next year as these problems get resolved.
My model here is televisions. The index for televisions had been falling for decades, but it surged by 10.2 percent from March to August (a 26.3 percent annual rate). Since August, the index for televisions has fallen sharply in the last three months, dropping by more than 4.0 percent. I expect that we will see a similar story with many other items in the year ahead. This reversal may come soon if it turns out that many stores over-ordered for the holiday shopping season.
Before going into the item-by-item assessment, I’ll add a point that is worth repeating. The bond markets seem to agree with the view that the inflation we have been seeing is temporary. The interest rate on a 10-year Treasury bond on Friday was under 1.5 percent. That put the breakeven inflation rate for an inflation-indexed bond and the conventional 10-year bond at less than 2.5 percent. (If we allow for the 0.2-0.4 percentage point difference between CPI inflation and inflation as measured by the personal consumption expenditure deflator, this is pretty much in line with the Fed’s 2.0 percent target.) Obviously, investors in the bond market are not expecting anything like 6.8 percent inflation to persist or even 4-5 percent inflation.
This should be somewhat reassuring, but as someone who was warning about both the stock bubble in the 1990s and the housing bubble in the 2000s, I know financial markets can be wrong. But it is still worth paying some attention to what people with money on the line are doing.
Inflation: November 2021 to November 2022
I can’t claim to have a crystal ball that tells me what inflation in the different components will be over the next year, but there is some basis for making reasonable guesses. So here is my story. I welcome corrections/additions by people who are more knowledgeable about specific areas.[1]
| Projected | Contribution | |||||||
| Inflation | Inflation | of | ||||||
| (weights) | Nov 20-Nov 21 | Nov 21-Nov 22 | Component | |||||
| All items | 100 | 6.8 | -0.54 | |||||
| Core | 78.536 | 4.9 | 0.43 | |||||
| Food at home | 7.733 | 6.4 | 1 | 0.08 | ||||
| Food away from home | 6.262 | 5.8 | 2 | 0.13 | ||||
| Energy commodities | 4.207 | 57.5 | -18 | -0.76 | ||||
| Energy services | 3.262 | 10.7 | -10 | -0.33 | ||||
| New vehicles | 3.856 | 11.1 | -11 | -0.42 | ||||
| Used cars and trucks | 3.35 | 31.4 | -33.5 | -1.12 | ||||
| Motor vehicle parts and equipment | 0.401 | 10.2 | -1 | 0.00 | ||||
| Motor vehicle maintenance and repair(1) | 1.085 | 4.9 | 4 | 0.04 | ||||
| Motor vehicle insurance | 1.557 | 5.7 | 0.5 | 0.01 | ||||
| Airline fares | 0.596 | -3.7 | 20.1 | 0.12 | ||||
| Other Transportation services | 1.774 | 0 | 0.00 | |||||
| Alcoholic beverages | 0.997 | 1.9 | 1.9 | 0.02 | ||||
| Tobacco and smoking products | 0.615 | 8.9 | 3.9 | 0.02 | ||||
| Shelter | 32.425 | 3.8 | 3.5 | 1.13 | ||||
| Household furnishings and supplies | 3.774 | 6 | 0 | 0.00 | ||||
| Household operations | 0.89 | 8.4 | 5.5 | 0.05 | ||||
| Water and sewer and trash collection services | 1.074 | 3.5 | 3.5 | 0.04 | ||||
| Apparel | 2.725 | 5 | 0 | 0.00 | ||||
| Recreation commodities | 1.961 | 3.9 | -2.5 | -0.05 | ||||
| Recreation services | 3.703 | 2.8 | 3.5 | 0.13 | ||||
| Medical care commodities | 1.493 | 0.2 | 0.5 | 0.01 | ||||
| Medical care services | 7.002 | 2.1 | 3 | 0.21 | ||||
| Education and communication commodities | 0.48 | 0.9 | -3.6 | -0.02 | ||||
| Education and communication services | 6.043 | 1.7 | 1.7 | 0.10 | ||||
| Personal care products | 0.643 | -0.2 | -0.2 | 0.00 | ||||
| Miscellaneous personal goods | 0.195 | 6 | -1 | 0.00 | ||||
| Other personal services | 1.632 | 4.5 | 4.5 | 0.07 | ||||
Source: Bureau of Labor Statistics and author’s calculations.
Gasoline and Other Energy
Higher gas prices have featured front and center in the story of runaway inflation impoverishing the masses. The good news here is that we can be pretty certain that prices will decline. The price of oil fell to ridiculously low levels in the pandemic (futures prices were actually negative). They then soared to more than $83 a barrel at the start of November as the economy reopened. They have since fallen back to $71 a barrel.
The surge in oil prices led to a huge jump in gasoline prices, which were up 58.1 percent over the last year. I’m betting on an 18.0 percent decline over the next year. This is simply taking where the CPI gas index was back in October of 2018 when the price of oil was roughly at its current level.
I don’t know whether oil prices will go higher or lower from today forward, but there is a good reason to expect the general direction will be downward. We know Biden and the Democrats are doing horrible things to the fossil fuel industry (imposing environmental regulations and restricting where they can drill) but the reality is that demand for fossil fuels is likely to be falling over the next decade.
Electric car sales are growing rapidly here and around the world. Tesla alone projects that it will be selling more than 20 million cars a year by 2030, a number that is almost 20 percent larger than the current U.S. car market. Take that with the appropriate amount of salt, but it seems likely that in the not distant future, most of the cars being sold will be electric.
As this switch takes place, the demand and price of fossil fuels are likely to fall. When producers look out to this future, many are likely to make the bet that it is better to get something for their oil today than risk having it still in the ground twenty or thirty years from now when there may be very little demand. This logic is likely to be especially important for big OPEC producers, like Saudi Arabia, that have very low marginal costs for bringing oil to the market.
Anyhow, that prediction on oil prices is obviously very speculative, but I’ll just put down my -18.0 percent for gas based on the current price. I’m applying this figure to the larger category of energy commodities, since this is mostly gas and the other items have closely tracked gas prices.
For energy services, I’m putting in a projection of a 10.0 percent price decline, largely reversing a 13.3 percent increase since the start of the pandemic. Higher natural gas prices were clearly a big factor in this run-up, and natural gas prices have also been falling sharply in recent weeks. The pattern over the last dozen years has been that sharp increases in this category were quickly followed by sharp declines. The index for energy services was just about 5.0 percent higher before the pandemic than it was a decade earlier.
Food
I can’t say I have a good idea where food prices are going, primarily because I don’t really know what has caused them to go up so much, 6.4 percent over the last year for the food at home category. There is the obvious point that we seem to be eating a lot more food, but the question is why. Purchases of food for home consumption were 11.1 percent higher (adjusted for inflation) in the third quarter of 2021 than in the fourth quarter of 2019. By contrast, food purchases were just 2.8 percent higher in the fourth quarter of 2019 than they had been seven quarters earlier.
Part of this story is that people were buying less food at restaurants, but by the third quarter we were almost back to our pre-pandemic levels of restaurant sales, and by now we are above them, although somewhat below trend. So, are we really eating that much more food than before the pandemic and will that pattern continue?
And, just to be clear, we see the increase in every category. Real purchases of cereal and bakery products are up 14.4 percent, meat consumption 6.4 percent, dairy products 11.7 percent, with consumption of fruits and vegetables rising by the same amount.
I have no idea as to whether people will keep buying so much more food, but it doesn’t seem like a healthy development. Anyhow, for the path of inflation, I’m just going to assume that it follows past patterns. Where we have seen sharp price increases, they have generally been reversed or at least followed by periods of slow price growth.
Food prices rose by 6.6 percent from December 2007 to December 2008. They then fell by 2.4 percent the following year. They rose 6.0 percent from December 2010 to 2011, then rose just 1.3 percent the following year. In the decade before the pandemic began, they rose an average of 1.3 percent annually. After their 6.1 percent rise last year, I’ll put down a 1.0 percent increase over the next twelve months.
Restaurant prices have generally risen by about a percentage point more than food prices, presumably reflecting rising higher labor costs. The opposite has been true over the last year, with restaurant prices going up 5.8 percent, but I’ll assume this pattern resumes over the next year. I’ll put down 2.0 percent for the projected increase in restaurant prices.
Cars and Trucks
New and used cars have been an enormous factor in the inflation we have seen over the last year. Used vehicle prices rose by 31.4 percent and contributed 1.1 percentage points to the inflation rate over the last year. New vehicle prices rose by 11.1 percent and added 0.4 percentage points to the inflation rate.
The reason for these extraordinary price increases is hardly a secret, a fire in a major semiconductor factory in Japan has led to a worldwide shortage of semiconductors. This has led to major reductions in auto production in factories around the world.
While there is still a shortage of semiconductors, several major manufacturers report being back up to capacity. It is reasonable to expect that most factories will be running near capacity within a few months and the auto market will be close to normal by November of next year.
New vehicle prices are up 12.6 percent since the pandemic began. In the seven years from February 2013 to February 2020, they increased by a total of just over 1.0 percent. I’m going to assume that in the next year prices will return to something like their former path. I’m putting down a price drop of 11.0 percent.
Used vehicle prices are up 33.5 percent since the pandemic began. The used vehicle index had actually been falling in the years prior to the pandemic. I will assume that the increase since the pandemic began is reversed over the next year.
Motor Vehicle Equipment and Parts
Prices in this component rose 10.4 percent in the last year after rising less than 1.0 percent annually over the decade prior to the pandemic. This reflects both supply chain issues and also the increased demand for parts as people sought to improve used cars for sale or their own use.
With car production returning to normal, and supply chain issues coming under control, I expect some of this rise to be reversed. I am putting down -1.0 percent for the next year.
Motor Vehicle Repair and Maintenance
Inflation in this component rose to 4.9 percent over the last year, up from 3.5 percent over the prior year. Some of this is undoubtedly due to supply chain disruptions associated with reopening, as well as higher labor costs. I’m assuming that inflation in this component will fall back to 4.0 percent in the next year.
Car Insurance
The index for car insurance had been rising rapidly early in the last decade, but slowed sharply in the years just before the pandemic. In the two years prior to the pandemic, it increased by an average of 0.5 percent. It then fell sharply in the pandemic only to then rise rapidly as the economy reopened, going up 5.7 percent over the last year.
It is important to recognize that the CPI uses a gross measure for auto insurance, counting premiums rather than administrative costs and profits, as it does with health insurance. The sharp rises earlier in the last decade were mostly due to higher payouts. If payments for damages and medical expenses are under control, then the rise in premiums is likely to be limited. I assume that the rise in the next year will be 0.5 percent.
Airline Fares
Airfares plummeted at the start of the pandemic. They have recovered to some extent, but they are still 20.1 percent below their pre-pandemic level. Assuming that the pandemic is under control, it is likely that fares will recover to their pre-pandemic level. I’m putting in a 20.1 percent increase in airfares over the next year.
Other Transportation Services
This is a hodgepodge that includes inner-city and intercity bus travel, state licensing fees, and car rentals. I’m putting down a prediction of no change based on the fact that I expect the 37.2 percent increase in car rental prices to be largely reversed in the next year. This component comprises almost exactly 10 percent of the whole category, so a sharp decline in rental car price should be sufficient to offset increases in the other components.
Alcohol and Tobacco
The index for alcoholic beverages rose 1.9 percent over the last year. This is pretty much in line with its average over the prior five years. I will put down 1.9 percent for next year.
Tobacco prices are driven largely by state and local taxes on tobacco. In the last year, they rose by 8.9 percent. This is considerably more rapid than the 3.9 percent average increase over the prior decade. I am assuming that the rate of increase slows to its prior average.
Rent and Shelter
The two rental components of the CPI, rent proper and owners’ equivalent rent (OER) for owner-occupied housing, are huge factors in determining inflation. Together they account for 31.1 percent of the overall index and 39.6 percent of the core CPI.
The rate of rental inflation slowed in 2020, but has accelerated as the economy reopened. The rent proper index has risen 3.0 percent over the last year, while the OER index has risen by 3.5 percent.
We have seen an interesting pattern develop since the pandemic began. Rents in high-priced areas are showing lower growth, while low-priced areas are seeing rapid rises. In the New York City metropolitan area, rents rose by 0.1 percent over the last year. In San Francisco, they fell by 0.5 percent. In Boston, rents are up 1.1 percent, and in DC by 0.2 percent. By contrast, Detroit rents were up 5.8 percent, in Atlanta 7.5 percent, and St. Louis 4.8 percent.
My guess is that this divergence continues, as workers with increased opportunities to work from home move to lower-priced parts of the country. That’s likely good news for most of the country – more affordable housing in expensive cities and a boost to growth in cities that had been previously left behind – but it’s not clear how it affects overall rental inflation.
One positive is that the rise in house prices during the pandemic, coupled with extraordinarily low interest rates, has led to a boom in housing construction. We’re on a path to having almost 1.8 million housing starts in 2021, up from less than 1.4 million in 2019. This is a positive development, but in a country with over 140 million housing units, an additional 400,000 is not going to have much impact on rents.
I will assume that both indexes return to roughly their pre-pandemic rates of inflation. I’m putting in 3.5 percent as my projection of inflation. This category also includes hotels. That index is currently 8.9 percent above its pre-pandemic level. This component accounts for less than 3.0 percent of the shelter index. I don’t expect that it will diverge enough from the 3.5 percent figure I’m putting down for rent to substantially alter the shelter projection.
Household Furnishings and Supplies
This component had a big spike in inflation in the last year, rising by 6.0 percent last year after having an average increase of less than 0.5 percent over the five years prior to the pandemic. This is the supply chain story. Many of the items in this category are imported, and even domestically produced items are tied up in transit. (It includes appliances.) As supply chain problems ease, there should be some price reversal. I expect that we will see prices in this category be roughly flat in the next year. I’m putting down no change.
Household Operations
This is a category that includes items like gardening and domestic workers. The index for “domestic services” rose 10.2 percent over the last year. (This is probably one reason why we are hearing so much about inflation in the media.) Overall, the index for household operations rose by 8.4 percent over the last year, presumably reflecting higher pay for workers in this sector.
It is likely that low-paid workers will continue to receive substantial pay increases in the year ahead. I’m putting down 5.5 percent for this category.
Water and Sewer and Trash Collection Services
Prices in this category rose by 3.5 percent last year. This likely reflects higher wages for many workers. We are likely to see increases of roughly the same size in the year ahead. I’m putting down 3.5 percent.
Apparel
Apparel prices rose by 5.0 percent last year, after falling by 5.1 percent in the prior year. The general direction for apparel prices has been downward, with the February 2020 index about 4.0 percent lower than its level from five years earlier. I will assume the index stays flat, although the sharp rise in the dollar over the last year would be a factor that should lower apparel prices.
Recreation Commodities
This category includes many items caught up in the supply chain. My favorite example is televisions. As noted earlier, the index for televisions had been falling for decades, but then rose 10.2 percent from March to August (a 26.3 percent annual rate). They have fallen sharply the last three months, although are not yet back to their March level.
The index for this category as a whole had been falling consistently for the decade prior to the pandemic at more than a 2.0 percent annual rate. It rose 3.9 percent in the last year. I expect the prior trend to return. Prices should fall by roughly 2.5 percent in the next year.
Recreation Services
Inflation in this category has been very contained, in large part because the pandemic has hugely depressed demand. The index rose by just 2.7 percent over the last year, roughly the average increase over the prior five years. It is reasonable to expect some pick-up in this measure over the next year, both because demand will increase as pandemic fears ease, and because many of the low-paid workers in the sector will get higher wages. I’m putting down 3.5 percent.
Medical Care Commodities
This category is primarily prescription drugs. After rising rapidly earlier in the century, it has slowed sharply in recent years. The index rose by just 0.2 percent over the last year. This likely had more to do with political pressures than the pandemic.
Medical Services
Inflation in medical services has been very limited in the last year, with the index rising just 2.1 percent. This is a sharp slowing from its immediate pre-pandemic pace (it had risen 5.5 percent in the prior year), but from 2015 to 2020, it had risen by an average of just 3.4 percent.
There are factors pushing inflation in medical service prices in both directions going forward. On the one hand, many people put off care during the pandemic and will likely be making appointments when they feel more comfortable going to a medical facility. On the other hand, to be somewhat morbid, many of the people who were most in need of services died during the pandemic.
There is also the spread of telemedicine, which was far more widely adopted as a result of the pandemic. This should help to put downward pressure on prices. It is also likely that there will be considerable political pressure from the Biden administration and Congress to contain costs.
I am going to assume that, on net, this leaves us with a somewhat lower rate of inflation in health care services than we saw the prior five pre-pandemic years. I’m putting down 3.0 percent.
It is important to realize that most of the growth in prescription drug prices is not captured in the CPI index, since it only measures the prices of drugs currently on the market. If a new drug comes out carrying a price of $55,000 for a year’s dosage (like Aduhelm, the new Alzheimer’s drug), it does not affect the CPI. However, if the price declines in years down the road, due to new competition or going off-patent, this drop will show up in the index.
I will assume that this index rises by 0.5 percent over the next year.
Education and Communication Commodities
This includes a variety of items such as textbooks, computers, and smartphones. The index rose 0.9 percent last year, after falling at an average annual rate of 3.6 percent over the prior decade. I am assuming that this rate of decline resumes in the next year. I’m putting down -3.6 percent.
Education and Communication Services
This component combines college tuition and child care with telephone and Internet service. The former categories have seen modest price increases in the years before the pandemic, while communication services have generally been declining in price. College tuition growth is likely to be restrained in the near future as many schools will still rely to a large extent on remote learning and feel a need to restrain tuition increases. Phone and Internet providers may also feel some need to restrain price increases in response to political pressure.
Inflation in this component was 1.7 percent over the last year. I have assumed that it will be 1.7 percent again in the year going forward.
Personal Care Products
This category includes items like shaving cream, toothpaste, and shampoo. The index fell by 0.2 percent last year, roughly in line with past patterns. I will put down a decline of 0.2 percent for the next year.
Other Personal Services
This category includes a wide range of items like haircuts, legal services, and tax preparation. It rose by 4.5 percent last year, up from an average close to 2.5 percent in prior years. This presumably reflects more rapid pay growth for many of the lower-paid workers in this category. I am putting down 4.5 percent for next year.
Miscellaneous Personal Goods
I don’t know what these are. The index rose by 6.0 percent last year. Prices had been falling by an average of a bit more than 1.0 percent annually in the decade before the pandemic. I will assume that the rise last year was due to supply chain problems and that the decline will resume next year. I’m putting down -1.0 percent for this category.
Are We Good on Inflation?
I tried to use a critical eye in putting down these numbers. Some, like gas prices, clearly have a more solid foundation than others. I’m sure someone could justify different and higher numbers in each category, but these are my best guesses with the information I have. I welcome comments and criticisms.
[1] Careful observers will note that my weights only add up to 99.735. (They are actually “relative importance,” but we’ll leave that for another day.) I’m obviously missing some component that has a weight of 0.265 in the index. Suggestions welcome.
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• COVID-19CoronavirusEconomic Crisis and RecoveryCrisis económica y recuperación
At this point, we still don’t know very much about the omicron variant, except that it spreads far more quickly than the delta variant. The data show a sharp upsurge in COVID-19 cases in South Africa, most of which seem to be omicron. There have also been several instances of what turned out to be super-spreader events in Norway, Denmark, and the UK where a ridiculously high percentage of the attendees became infected with omicron. (At a Christmas party in Norway, 70 of 120 guests tested positive.)
The variant also seems to be able to get around the immunity built up from vaccines or prior infections. In principle, all the people infected at the super-spreader event in Norway had been fully vaccinated, since this was a precondition for admission. In South Africa, many of the people who have been hospitalized with infections already should have had some immunity from prior infections. In short, we can be pretty confident that omicron spreads much more quickly than delta or earlier variants.
That is the bad news with omicron. The good news is that the evidence to date indicates that it is far less severe than delta. Most of our evidence on severity comes from South Africa, where it was first detected. The reports from hospitals there indicate that a much smaller percentage of the people who get infected need oxygen and end up in intensive care units. It also seems that a much smaller percentage are dying.
The country has an upsurge in reported cases that began two weeks ago. Yet, there is no clear uptick in COVID-19-related deaths. The figure for the most recent day (December 10th) was 20 deaths, which would be the equivalent of 110 deaths a day in the United States, less than one-tenth of our current number.
It is possible that we will have to wait longer to see the effect of omicron on serious illness and death. There is typically a substantial gap between when people are infected and when they get seriously ill or die. Also, the case numbers have continued to grow rapidly, so two weeks out from the current levels we may be looking at many more people in intensive care units or dying.
It is also pointed out that most of the cases in South Africa are younger people, who presumably are at less risk from COVID-19. This is an important caution, but it’s worth thinking about this issue more closely. Younger people are generally not isolated from the rest of the population. People in their twenties or thirties who got infected two or three weeks ago surely came in contact with parents, friends, and coworkers who are older.
If these older people either did not get infected or are not showing up at hospitals with serious symptoms, then it would seem to imply that omicron does not pose an especially serious threat to older people. There may well be more to the story that will become apparent further down the road, but it isn’t plausible that, at this point, only younger people in South Africa have been exposed to the Omicron Variant.
The Spread of a Less Harmful Variant
Recognizing that we still have little basis for assessing virulence, it’s worth considering what it would mean if omicron does spread widely throughout the world, which seems likely, and it is considerably less harmful than delta. Of course, the big issue is how much less harmful. If three times as many people get infected, and omicron is half as likely to lead to hospitalization and death, we would still be looking at a pretty awful story.
One thing that is very encouraging on this front is the experience of the people at the super-spreader Norwegian Christmas party. These were all vaccinated people and apparently in relatively good health, but it seems that none of them developed serious symptoms and needed to be hospitalized. If this is a general pattern, then we can expect that fully vaccinated people, without serious health conditions, have little to fear from omicron, perhaps even less than they did from delta.
While that is a good chunk of the population in the US and other wealthy countries, this still leaves the elderly, people with health issues, and the unvaccinated. We will probably have to see how things play out in South Africa and elsewhere to get a better sense of what to expect in the United States, but from what we have seen to date, they may not face a bad story either, or at least no worse than the one they faced with the delta variant.
Here also the limited information from South Africa is encouraging. Just 30 percent of its population is vaccinated and less than 26 percent is fully vaccinated. This means that a large number of unvaccinated people must be getting infected with the omicron variant. Yet, we are not seeing its hospitals fill up with seriously ill patients, and its death figures are still relatively low. Again, this could change in the days ahead as the disease has had more opportunity to progress in people recently infected, but it is at least plausible that even people who are not vaccinated have less to fear from omicron than delta.
What Happens if a Mild Omicron Variant Displaces Delta?
If it proves to be the case that omicron poses substantially less risk of serious illness or death than delta, and the difference more than offsets the increase in the number of infections, then the spread of omicron in the United States may be very good news. It will almost certainly mean an increase in the number of infections since it will spread more quickly, but it would mean a reduction in the number of hospitalizations and deaths.
There will be a huge question of timing. Even if the risk of hospitalization and death is only a fifth as great as with delta (a number pulled out of the air), if it spreads ten times as quickly, it will mean twice as many people ending up in hospitals and ICUs. This means that it would still be necessary to take steps to limit the rate at which it spreads.
However, if it turns out that the difference in the severity with delta is larger than the difference in spread, the omicron variant may prove to be very good news. It can lead to a situation where we do achieve something close to herd immunity, with most of the population either being vaccinated or having an infection with omicron. (The evidence from South Africa is that prior infections with other variants do not provide much protection from omicron.) Getting to that point would be a huge victory.
Of course, we are quite far from anything like herd immunity at present. The delta variant is still by far the dominant strain in the United States. We are averaging more than 120,000 cases a day and more than 1,200 deaths. Hospitals and ICUs are packed in many parts of the country.
The story continues to be overwhelmingly one of unvaccinated people getting seriously ill and dying. For whatever reason, we continue to see large numbers of people who refuse to take the pandemic seriously. Their risk affects not only their own lives, but also the health of their family and communities, as many hospitals can no longer provide normal care to non-COVID-19 patients. This is a very unpretty picture, but there is at least a possibility that the spread of omicron will make the situation better rather than worse.
At this point, we still don’t know very much about the omicron variant, except that it spreads far more quickly than the delta variant. The data show a sharp upsurge in COVID-19 cases in South Africa, most of which seem to be omicron. There have also been several instances of what turned out to be super-spreader events in Norway, Denmark, and the UK where a ridiculously high percentage of the attendees became infected with omicron. (At a Christmas party in Norway, 70 of 120 guests tested positive.)
The variant also seems to be able to get around the immunity built up from vaccines or prior infections. In principle, all the people infected at the super-spreader event in Norway had been fully vaccinated, since this was a precondition for admission. In South Africa, many of the people who have been hospitalized with infections already should have had some immunity from prior infections. In short, we can be pretty confident that omicron spreads much more quickly than delta or earlier variants.
That is the bad news with omicron. The good news is that the evidence to date indicates that it is far less severe than delta. Most of our evidence on severity comes from South Africa, where it was first detected. The reports from hospitals there indicate that a much smaller percentage of the people who get infected need oxygen and end up in intensive care units. It also seems that a much smaller percentage are dying.
The country has an upsurge in reported cases that began two weeks ago. Yet, there is no clear uptick in COVID-19-related deaths. The figure for the most recent day (December 10th) was 20 deaths, which would be the equivalent of 110 deaths a day in the United States, less than one-tenth of our current number.
It is possible that we will have to wait longer to see the effect of omicron on serious illness and death. There is typically a substantial gap between when people are infected and when they get seriously ill or die. Also, the case numbers have continued to grow rapidly, so two weeks out from the current levels we may be looking at many more people in intensive care units or dying.
It is also pointed out that most of the cases in South Africa are younger people, who presumably are at less risk from COVID-19. This is an important caution, but it’s worth thinking about this issue more closely. Younger people are generally not isolated from the rest of the population. People in their twenties or thirties who got infected two or three weeks ago surely came in contact with parents, friends, and coworkers who are older.
If these older people either did not get infected or are not showing up at hospitals with serious symptoms, then it would seem to imply that omicron does not pose an especially serious threat to older people. There may well be more to the story that will become apparent further down the road, but it isn’t plausible that, at this point, only younger people in South Africa have been exposed to the Omicron Variant.
The Spread of a Less Harmful Variant
Recognizing that we still have little basis for assessing virulence, it’s worth considering what it would mean if omicron does spread widely throughout the world, which seems likely, and it is considerably less harmful than delta. Of course, the big issue is how much less harmful. If three times as many people get infected, and omicron is half as likely to lead to hospitalization and death, we would still be looking at a pretty awful story.
One thing that is very encouraging on this front is the experience of the people at the super-spreader Norwegian Christmas party. These were all vaccinated people and apparently in relatively good health, but it seems that none of them developed serious symptoms and needed to be hospitalized. If this is a general pattern, then we can expect that fully vaccinated people, without serious health conditions, have little to fear from omicron, perhaps even less than they did from delta.
While that is a good chunk of the population in the US and other wealthy countries, this still leaves the elderly, people with health issues, and the unvaccinated. We will probably have to see how things play out in South Africa and elsewhere to get a better sense of what to expect in the United States, but from what we have seen to date, they may not face a bad story either, or at least no worse than the one they faced with the delta variant.
Here also the limited information from South Africa is encouraging. Just 30 percent of its population is vaccinated and less than 26 percent is fully vaccinated. This means that a large number of unvaccinated people must be getting infected with the omicron variant. Yet, we are not seeing its hospitals fill up with seriously ill patients, and its death figures are still relatively low. Again, this could change in the days ahead as the disease has had more opportunity to progress in people recently infected, but it is at least plausible that even people who are not vaccinated have less to fear from omicron than delta.
What Happens if a Mild Omicron Variant Displaces Delta?
If it proves to be the case that omicron poses substantially less risk of serious illness or death than delta, and the difference more than offsets the increase in the number of infections, then the spread of omicron in the United States may be very good news. It will almost certainly mean an increase in the number of infections since it will spread more quickly, but it would mean a reduction in the number of hospitalizations and deaths.
There will be a huge question of timing. Even if the risk of hospitalization and death is only a fifth as great as with delta (a number pulled out of the air), if it spreads ten times as quickly, it will mean twice as many people ending up in hospitals and ICUs. This means that it would still be necessary to take steps to limit the rate at which it spreads.
However, if it turns out that the difference in the severity with delta is larger than the difference in spread, the omicron variant may prove to be very good news. It can lead to a situation where we do achieve something close to herd immunity, with most of the population either being vaccinated or having an infection with omicron. (The evidence from South Africa is that prior infections with other variants do not provide much protection from omicron.) Getting to that point would be a huge victory.
Of course, we are quite far from anything like herd immunity at present. The delta variant is still by far the dominant strain in the United States. We are averaging more than 120,000 cases a day and more than 1,200 deaths. Hospitals and ICUs are packed in many parts of the country.
The story continues to be overwhelmingly one of unvaccinated people getting seriously ill and dying. For whatever reason, we continue to see large numbers of people who refuse to take the pandemic seriously. Their risk affects not only their own lives, but also the health of their family and communities, as many hospitals can no longer provide normal care to non-COVID-19 patients. This is a very unpretty picture, but there is at least a possibility that the spread of omicron will make the situation better rather than worse.
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Actually, the Washington Post forgot to make this point in an article that told readers that 496 employees in Los Angeles public schools are going to be fired for failing to comply with a vaccine mandate. The article cites the school district as saying that nearly 99 percent of its employees complied with the mandate.
In assessing the importance of losing 496 employees over the mandate, it would have been useful to tell readers that 1.4 percent of employees in state and local education lose or leave their job in a typical month, according to the Bureau of Labor Statistics Job Opening and Labor Turnover Survey. This means that the number of employees who stand to be fired over the mandate is less than the number who would be fired or quit their job in a typical month.
Actually, the Washington Post forgot to make this point in an article that told readers that 496 employees in Los Angeles public schools are going to be fired for failing to comply with a vaccine mandate. The article cites the school district as saying that nearly 99 percent of its employees complied with the mandate.
In assessing the importance of losing 496 employees over the mandate, it would have been useful to tell readers that 1.4 percent of employees in state and local education lose or leave their job in a typical month, according to the Bureau of Labor Statistics Job Opening and Labor Turnover Survey. This means that the number of employees who stand to be fired over the mandate is less than the number who would be fired or quit their job in a typical month.
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• EnvironmentGlobalization and TradeGlobalización y comercio
The New York Times told readers that the United Mine Workers are a major force in opposing Biden’s measures on climate change. While it noted that there are less than 50,000 unionized mine workers in the country: “miners have long punched above their weight thanks to their concentration in election battleground states like Pennsylvania or states with powerful senators, like Joe Manchin III of West Virginia.”
While the importance of Senator Manchin to Biden’s plans is undeniable, the rest of the story makes no sense.
According to the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages, there were less than 5,100 coal miners in Pennsylvania in 2019. (It doesn’t have data for 2020 or 2021.) Pennsylvania has a population of more than 12.8 million.
In an incredibly optimistic scenario Biden, or any other Democrat, might lose these mineworkers by a margin of 60-40, meaning that he is down by roughly 1,000 votes among these workers. In a very bad scenario, they may lose this group by a 90-10 margin, meaning that the margin is 4,000 votes.
The difference between the very optimistic and very pessimistic scenario is 3,000 votes. This is less than 0.05 percent of 6.8 million votes cast in the 2020 presidential election in Pennsylvania. (Yeah, they have friends and family, but let’s be serious.) Rather than being located in battleground states, the vast majority of the country’s 42,000 coal miners are located in solidly Republican states like Wyoming, West Virginia, and Alabama.
It is also worth noting how few unionized coal miners are left in the country. The Bureau of Labor Statistics reports that there were 37,000 union members employed in all forms of mining in 2020. This includes unionized miners in industries like copper, silver, and gold mining. Coal miners account for less than 7.0 percent of this larger category. Even if coal miners are unionized at twice the rate as the sector as a whole, it would still mean there are less than 10,000 unionized miners in the country.
It is also striking that the concern over job loss only seems to come up with reference to environmental issues. The coal industry lost tens of thousands of jobs in the last two decades as natural gas from fracking operations displaced coal as the preferred fuel for power plants across the country. For some reason, losing jobs to fracked natural gas apparently was not an issue for the coal miners’ union. The industry also lost more than 100,000 jobs in the 1980s and 1990s as strip mining replaced underground mining.
The piece also makes an absurd comparison of the potential loss of coal mining jobs to the loss of manufacturing jobs due to trade. We lost almost 4 million manufacturing jobs due to the explosion of the trade deficit between 1997 and 2007 (before the Great Recession).
While it is stylish in elite circles to blame this job loss on technology, the geniuses who make this claim have yet to explain why technology seemed to cost so many manufacturing jobs in a decade where the trade deficit exploded, but not in the prior quarter-century or in the years since the trade deficit stabilized. (We have added back more than 1.2 million manufacturing jobs between the trough of the Great Recession and the pre-pandemic peak.)
The number of jobs at risk in coal mining due to climate measures is less than 1.0 percent of the number of manufacturing jobs actually lost due to trade. The impact of these risks to jobs does not deserve to be put in the same category.
The fact is the jobs impact in the coal industry from climate measures is relatively small in a national context and even in pretty much every state, except West Virginia. It is understandable that the mining industry would like to highlight the jobs issue because the public is likely to have far more sympathy with mine workers than mine owners. The NYT should not be assisting the industry in its efforts to inflate jobs concerns in order to block action on global warming.
The New York Times told readers that the United Mine Workers are a major force in opposing Biden’s measures on climate change. While it noted that there are less than 50,000 unionized mine workers in the country: “miners have long punched above their weight thanks to their concentration in election battleground states like Pennsylvania or states with powerful senators, like Joe Manchin III of West Virginia.”
While the importance of Senator Manchin to Biden’s plans is undeniable, the rest of the story makes no sense.
According to the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages, there were less than 5,100 coal miners in Pennsylvania in 2019. (It doesn’t have data for 2020 or 2021.) Pennsylvania has a population of more than 12.8 million.
In an incredibly optimistic scenario Biden, or any other Democrat, might lose these mineworkers by a margin of 60-40, meaning that he is down by roughly 1,000 votes among these workers. In a very bad scenario, they may lose this group by a 90-10 margin, meaning that the margin is 4,000 votes.
The difference between the very optimistic and very pessimistic scenario is 3,000 votes. This is less than 0.05 percent of 6.8 million votes cast in the 2020 presidential election in Pennsylvania. (Yeah, they have friends and family, but let’s be serious.) Rather than being located in battleground states, the vast majority of the country’s 42,000 coal miners are located in solidly Republican states like Wyoming, West Virginia, and Alabama.
It is also worth noting how few unionized coal miners are left in the country. The Bureau of Labor Statistics reports that there were 37,000 union members employed in all forms of mining in 2020. This includes unionized miners in industries like copper, silver, and gold mining. Coal miners account for less than 7.0 percent of this larger category. Even if coal miners are unionized at twice the rate as the sector as a whole, it would still mean there are less than 10,000 unionized miners in the country.
It is also striking that the concern over job loss only seems to come up with reference to environmental issues. The coal industry lost tens of thousands of jobs in the last two decades as natural gas from fracking operations displaced coal as the preferred fuel for power plants across the country. For some reason, losing jobs to fracked natural gas apparently was not an issue for the coal miners’ union. The industry also lost more than 100,000 jobs in the 1980s and 1990s as strip mining replaced underground mining.
The piece also makes an absurd comparison of the potential loss of coal mining jobs to the loss of manufacturing jobs due to trade. We lost almost 4 million manufacturing jobs due to the explosion of the trade deficit between 1997 and 2007 (before the Great Recession).
While it is stylish in elite circles to blame this job loss on technology, the geniuses who make this claim have yet to explain why technology seemed to cost so many manufacturing jobs in a decade where the trade deficit exploded, but not in the prior quarter-century or in the years since the trade deficit stabilized. (We have added back more than 1.2 million manufacturing jobs between the trough of the Great Recession and the pre-pandemic peak.)
The number of jobs at risk in coal mining due to climate measures is less than 1.0 percent of the number of manufacturing jobs actually lost due to trade. The impact of these risks to jobs does not deserve to be put in the same category.
The fact is the jobs impact in the coal industry from climate measures is relatively small in a national context and even in pretty much every state, except West Virginia. It is understandable that the mining industry would like to highlight the jobs issue because the public is likely to have far more sympathy with mine workers than mine owners. The NYT should not be assisting the industry in its efforts to inflate jobs concerns in order to block action on global warming.
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• Economic Crisis and RecoveryCrisis económica y recuperación
The November jobs report left a number of people, including me, somewhat confused. The data from the survey of households was great. The unemployment rate fell by 0.4 percentage points to 4.2 percent, with over 1.1 million more people reporting that they were employed. This was far better than the consensus forecast, which put the drop at 0.1-0.2 percentage points. (My number was 4.3 percent.)
It’s worth noting that 4.2 percent is a very low rate of unemployment by historical standards. The unemployment rate did not get this low from 1970 until 1999. Then, after the recession in 2001, it didn’t again fall to 4.2 percent until September of 2017. The unemployment rate for Blacks fell by 1.2 percentage points to 6.7 percent, a level not reached following the Great Recession until March 2018 and never prior to that time.
While the data in the household survey were much better than expected, the 210,000 jobs reported by the establishment survey was well below expectations, and the focus of most media coverage. There are several points to consider in assessing this number.
First, the prior two months’ data were revised up by a total of 82,000 jobs. This means the story on where we stand in November in regaining jobs is somewhat better than the 210,000 figure indicates. Also, the prior months’ data have all been subject to large upward revisions. This could mean we are looking at a much higher jobs growth figure for November when these data are revised.
The second point is that the public sector is continuing to lose jobs, shedding another 25,000 in November. This puts private sector job growth at 235,000. If the public sector had instead say gained back 50,000 of the more than 900,000 jobs it lost in the pandemic, we would have been looking at job growth of 285,000. (I have explained before that the issue holding back public sector hiring is that it is difficult for state and local governments to offer higher pay and hiring bonuses to compete with private employers.)
But the most important item missed in the coverage of the jobs report was the increase in the length of the average workweek. As a result of this increase, the index of aggregate hours increased by 0.5 percent. This would be equivalent to an increase of more than 630,000 private sector jobs if there had been no increase in the length of the workweek.
My assumption is that employers who are unable to attract workers are responding by increasing the hours of their current workforce. This fits with the story of rapid wage increases for lower-end workers and also the high number of quits and job openings being reported in recent months.
Okay, but enough with the data, let’s get to the Biden versus Trump comparison. I know that this comparison is silly since so many factors affect job growth that are beyond the president’s control. But, everyone knows that if the situation were reversed, Donald Trump and his crew would be touting the comparison in every forum they had. I’m doing this for them. As it now stands President Biden has created 5,875,000 jobs in his first ten months in the White House, compared to a loss of 2,876,000 jobs in the four years of Donald Trump’s presidency.
The November jobs report left a number of people, including me, somewhat confused. The data from the survey of households was great. The unemployment rate fell by 0.4 percentage points to 4.2 percent, with over 1.1 million more people reporting that they were employed. This was far better than the consensus forecast, which put the drop at 0.1-0.2 percentage points. (My number was 4.3 percent.)
It’s worth noting that 4.2 percent is a very low rate of unemployment by historical standards. The unemployment rate did not get this low from 1970 until 1999. Then, after the recession in 2001, it didn’t again fall to 4.2 percent until September of 2017. The unemployment rate for Blacks fell by 1.2 percentage points to 6.7 percent, a level not reached following the Great Recession until March 2018 and never prior to that time.
While the data in the household survey were much better than expected, the 210,000 jobs reported by the establishment survey was well below expectations, and the focus of most media coverage. There are several points to consider in assessing this number.
First, the prior two months’ data were revised up by a total of 82,000 jobs. This means the story on where we stand in November in regaining jobs is somewhat better than the 210,000 figure indicates. Also, the prior months’ data have all been subject to large upward revisions. This could mean we are looking at a much higher jobs growth figure for November when these data are revised.
The second point is that the public sector is continuing to lose jobs, shedding another 25,000 in November. This puts private sector job growth at 235,000. If the public sector had instead say gained back 50,000 of the more than 900,000 jobs it lost in the pandemic, we would have been looking at job growth of 285,000. (I have explained before that the issue holding back public sector hiring is that it is difficult for state and local governments to offer higher pay and hiring bonuses to compete with private employers.)
But the most important item missed in the coverage of the jobs report was the increase in the length of the average workweek. As a result of this increase, the index of aggregate hours increased by 0.5 percent. This would be equivalent to an increase of more than 630,000 private sector jobs if there had been no increase in the length of the workweek.
My assumption is that employers who are unable to attract workers are responding by increasing the hours of their current workforce. This fits with the story of rapid wage increases for lower-end workers and also the high number of quits and job openings being reported in recent months.
Okay, but enough with the data, let’s get to the Biden versus Trump comparison. I know that this comparison is silly since so many factors affect job growth that are beyond the president’s control. But, everyone knows that if the situation were reversed, Donald Trump and his crew would be touting the comparison in every forum they had. I’m doing this for them. As it now stands President Biden has created 5,875,000 jobs in his first ten months in the White House, compared to a loss of 2,876,000 jobs in the four years of Donald Trump’s presidency.
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The development of the new variant, which was first discovered in South Africa, can be attributed to our failure to open-source our vaccines and freely transfer technology, contrary to claims from the pharmaceutical industry and its political allies. Their big talking point is that South Africa currently has more vaccines than it can effectively use at the moment.
This claim ignores two important points. The first is that we really don’t know where this strain originated. It was first identified in South Africa in part because its screening system happened to catch it. South Africa then did the responsible thing and reported to the world that it had uncovered a new variant.
This doesn’t mean that the Omicron variant originated in South Africa. It has been identified in samples taken in the Netherlands several days before its discovery in South Africa. The variant was also identified in a sample in Nigeria that was taken in October. Since we are not sure where it originated at this point, it’s not clear that South Africa’s current ability to deliver vaccines has much relevance to the development of the omicron variant.
But a second point is even more important. The development of variants depends on the extent of the spread of the virus. The more people who get COVID-19, the more opportunity the virus has to mutate.
Suppose we had a genuine worldwide effort to contain the pandemic from when it was first recognized in February of 2020. Ideally, we would have seen international collaboration involving the sharing of technology and resources. This would have meant creating a world in which anyone with the production capacity, or the ability to develop the production capacity, could manufacture mRNA vaccines. It also would have meant coordinating the production and distribution of the less effective Chinese vaccines, as well as vaccines from Russia and India, until we could produce a sufficient number of mRNA vaccines.
If we had really engaged in an all out effort to get the world vaccinated, it is likely the vast majority of the world’s population could have been vaccinated by the summer. (China had produced close to 2 billion of its vaccines by the end of July.) This would have hugely slowed the spread of the pandemic and drastically reduced the likelihood of mutations.
Of course, we can never say for certain whether a specific variant would have developed in a world with much less spread, just as we can never say whether a particular hurricane is attributable to global warming. But we know that without global warming we would see fewer hurricanes and with less spread we would see fewer mutations.
So yes, blame government-granted patent monopolies. Maybe one day we can have a serious discussion of better mechanisms for financing the development of new drugs and vaccines. In the meantime, we need to double down on our efforts to get the world vaccinated as quickly as possible.
Correction:
An earlier version said that South Africa had a very good screening system for detecting variants. While it does have the best system in Africa, it screens a far smaller portion of its tests that most wealthy countries.
The development of the new variant, which was first discovered in South Africa, can be attributed to our failure to open-source our vaccines and freely transfer technology, contrary to claims from the pharmaceutical industry and its political allies. Their big talking point is that South Africa currently has more vaccines than it can effectively use at the moment.
This claim ignores two important points. The first is that we really don’t know where this strain originated. It was first identified in South Africa in part because its screening system happened to catch it. South Africa then did the responsible thing and reported to the world that it had uncovered a new variant.
This doesn’t mean that the Omicron variant originated in South Africa. It has been identified in samples taken in the Netherlands several days before its discovery in South Africa. The variant was also identified in a sample in Nigeria that was taken in October. Since we are not sure where it originated at this point, it’s not clear that South Africa’s current ability to deliver vaccines has much relevance to the development of the omicron variant.
But a second point is even more important. The development of variants depends on the extent of the spread of the virus. The more people who get COVID-19, the more opportunity the virus has to mutate.
Suppose we had a genuine worldwide effort to contain the pandemic from when it was first recognized in February of 2020. Ideally, we would have seen international collaboration involving the sharing of technology and resources. This would have meant creating a world in which anyone with the production capacity, or the ability to develop the production capacity, could manufacture mRNA vaccines. It also would have meant coordinating the production and distribution of the less effective Chinese vaccines, as well as vaccines from Russia and India, until we could produce a sufficient number of mRNA vaccines.
If we had really engaged in an all out effort to get the world vaccinated, it is likely the vast majority of the world’s population could have been vaccinated by the summer. (China had produced close to 2 billion of its vaccines by the end of July.) This would have hugely slowed the spread of the pandemic and drastically reduced the likelihood of mutations.
Of course, we can never say for certain whether a specific variant would have developed in a world with much less spread, just as we can never say whether a particular hurricane is attributable to global warming. But we know that without global warming we would see fewer hurricanes and with less spread we would see fewer mutations.
So yes, blame government-granted patent monopolies. Maybe one day we can have a serious discussion of better mechanisms for financing the development of new drugs and vaccines. In the meantime, we need to double down on our efforts to get the world vaccinated as quickly as possible.
Correction:
An earlier version said that South Africa had a very good screening system for detecting variants. While it does have the best system in Africa, it screens a far smaller portion of its tests that most wealthy countries.
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The New York Times had an interesting piece about how a medical researcher may have found a cure for Type 1 diabetes after three decades of research following his son being diagnosed with the illness. While the drug he developed may potentially be a great breakthrough, the piece included this discouraging comment:
“The company [Vertex, which bought up the rights to the drug] will not announce a price for its diabetes treatment until it is approved. But it is likely to be expensive. Like other companies, Vertex has enraged patients with high prices for drugs that are difficult and expensive to make.”
There are two important points here. First, the high prices are not the result of drugs being “difficult and expensive to make.” It is unlikely that the drug referred to in the linked piece, Orkambi, a treatment for cystic fibrosis, costs Vertex even one-tenth the $270,000 sale price. The price is due to the fact that the drug is ostensibly a cure for a debilitating disease, and Vertex owns a government-granted patent monopoly on it, and then is allowed to charge what it wants.
The other point is that we don’t need to grant patent monopolies as a way to pay for expensive clinical trials, as this piece implies. The government can pay for the trials directly, as it just did in the case of Moderna’s Covid vaccine. (I describe a mechanism for doing this in chapter 5 of Rigged [it’s free].) High drug prices are a policy choice, not an inevitable outcome of the drug development process.
The New York Times had an interesting piece about how a medical researcher may have found a cure for Type 1 diabetes after three decades of research following his son being diagnosed with the illness. While the drug he developed may potentially be a great breakthrough, the piece included this discouraging comment:
“The company [Vertex, which bought up the rights to the drug] will not announce a price for its diabetes treatment until it is approved. But it is likely to be expensive. Like other companies, Vertex has enraged patients with high prices for drugs that are difficult and expensive to make.”
There are two important points here. First, the high prices are not the result of drugs being “difficult and expensive to make.” It is unlikely that the drug referred to in the linked piece, Orkambi, a treatment for cystic fibrosis, costs Vertex even one-tenth the $270,000 sale price. The price is due to the fact that the drug is ostensibly a cure for a debilitating disease, and Vertex owns a government-granted patent monopoly on it, and then is allowed to charge what it wants.
The other point is that we don’t need to grant patent monopolies as a way to pay for expensive clinical trials, as this piece implies. The government can pay for the trials directly, as it just did in the case of Moderna’s Covid vaccine. (I describe a mechanism for doing this in chapter 5 of Rigged [it’s free].) High drug prices are a policy choice, not an inevitable outcome of the drug development process.
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