Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

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.

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.

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.

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.

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.

 

 

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.

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.

Former New York Times reporter Donald McNeil had an interesting Medium piece on how antitrust law could be impeding the development of effective treatments for COVID-19. McNeil argued that COVID-19 treatments that were developed by Pfizer and Merck, and are now in the final stages of testing, may work best when taken together.

He argues that this may be the case because the drugs use two fundamentally different mechanisms for attacking the virus. By using the two in combination, we would be maximizing the likelihood that at least one would be effective. This has been the approach followed with effective H.I.V. drugs, as well as Hepatitis C treatments.

McNeil argues that the reason combinations are not pursued is because of antitrust laws. If, instead of competing with their different drugs, two giant drug manufacturers, like Pfizer and Merck, were to collaborate to produce the best possible treatment for COVID-19, they would be risking an antitrust action from the government or competing drug companies. McNeil recommends waiving antitrust rules when lifesaving medications are involved.

While that would clearly be desirable in this case, it is worth stepping back a minute. Let’s imagine that we were not relying on government-granted patent monopolies to finance biomedical research. Suppose that, instead of granting monopolies, the government just paid for the research upfront. (This is pretty much what we did with Moderna’s vaccine, but we also gave them a patent monopoly.)

If the government was paying for the research, a condition of getting the funding would be that all results are fully open.[1] In that context, Pfizer, Merck, and anyone else doing research on treating COVID-19 would have every reason in the world to examine the effectiveness of using drugs in combination.

The incentive would be for showing results that improved people’s health, not advancing the prospects for a specific drug. (I recommend the funding take the form of long-term contracts, which could be renewed and expanded, depending on the results shown from prior rounds of funding.) This system would also have the benefit that no one would have the incentive to hide results that reflected poorly on particular drugs (e.g. the addictiveness of the new generation of opioids).

In this context antitrust would not be an issue. All drugs would be produced as generics from the day they came on the market. While there could be some basis for concern if manufacturing became too concentrated, there would be no problems associated with companies collaborating in the development of new drugs.

Ideally, we would also be seeing this sort of collaboration internationally. This is what many of us hoped for at the start of the pandemic. Imagine if we had been prepared to collaborate with China to have their vaccines distributed as widely as possible, while we waited for production of the more effective mRNA vaccines to ramp up. (And, everyone in the world would be able to produce the mRNA vaccines if they could develop or convert the manufacturing capacity.) We might have saved hundreds of thousands, or even millions, of lives and substantially slowed the spread.

The pandemic presented an opportunity to experiment with new ways of supporting the development of vaccines, tests, and treatments. Unfortunately, we instead dug deeper into our prior methods, with great cost in lives, as well as the health of people around the world. It might be late in the game in terms of combatting this pandemic, but some new thinking would be tremendously valuable in preparing for the next pandemic, as well as our ongoing struggles with cancer, heart disease, and other longstanding health issues.

[1] I outline how this sort of funding mechanism could work in chapter 5 of Rigged [it’s free].

Former New York Times reporter Donald McNeil had an interesting Medium piece on how antitrust law could be impeding the development of effective treatments for COVID-19. McNeil argued that COVID-19 treatments that were developed by Pfizer and Merck, and are now in the final stages of testing, may work best when taken together.

He argues that this may be the case because the drugs use two fundamentally different mechanisms for attacking the virus. By using the two in combination, we would be maximizing the likelihood that at least one would be effective. This has been the approach followed with effective H.I.V. drugs, as well as Hepatitis C treatments.

McNeil argues that the reason combinations are not pursued is because of antitrust laws. If, instead of competing with their different drugs, two giant drug manufacturers, like Pfizer and Merck, were to collaborate to produce the best possible treatment for COVID-19, they would be risking an antitrust action from the government or competing drug companies. McNeil recommends waiving antitrust rules when lifesaving medications are involved.

While that would clearly be desirable in this case, it is worth stepping back a minute. Let’s imagine that we were not relying on government-granted patent monopolies to finance biomedical research. Suppose that, instead of granting monopolies, the government just paid for the research upfront. (This is pretty much what we did with Moderna’s vaccine, but we also gave them a patent monopoly.)

If the government was paying for the research, a condition of getting the funding would be that all results are fully open.[1] In that context, Pfizer, Merck, and anyone else doing research on treating COVID-19 would have every reason in the world to examine the effectiveness of using drugs in combination.

The incentive would be for showing results that improved people’s health, not advancing the prospects for a specific drug. (I recommend the funding take the form of long-term contracts, which could be renewed and expanded, depending on the results shown from prior rounds of funding.) This system would also have the benefit that no one would have the incentive to hide results that reflected poorly on particular drugs (e.g. the addictiveness of the new generation of opioids).

In this context antitrust would not be an issue. All drugs would be produced as generics from the day they came on the market. While there could be some basis for concern if manufacturing became too concentrated, there would be no problems associated with companies collaborating in the development of new drugs.

Ideally, we would also be seeing this sort of collaboration internationally. This is what many of us hoped for at the start of the pandemic. Imagine if we had been prepared to collaborate with China to have their vaccines distributed as widely as possible, while we waited for production of the more effective mRNA vaccines to ramp up. (And, everyone in the world would be able to produce the mRNA vaccines if they could develop or convert the manufacturing capacity.) We might have saved hundreds of thousands, or even millions, of lives and substantially slowed the spread.

The pandemic presented an opportunity to experiment with new ways of supporting the development of vaccines, tests, and treatments. Unfortunately, we instead dug deeper into our prior methods, with great cost in lives, as well as the health of people around the world. It might be late in the game in terms of combatting this pandemic, but some new thinking would be tremendously valuable in preparing for the next pandemic, as well as our ongoing struggles with cancer, heart disease, and other longstanding health issues.

[1] I outline how this sort of funding mechanism could work in chapter 5 of Rigged [it’s free].

Okay, I’m an economist nerd, so don’t expect a rundown of all the good things and bad things we have seen in the last year. I will focus on the economy, but I have to say a few words about the pandemic.

No one can be happy about the resurgence of case numbers this fall, but there is an important point worth recognizing. As public health experts have repeatedly said, this is now a pandemic of the unvaccinated. I realize that many people who have been vaccinated are still getting the virus (including me).

But the people filling the hospitals, and especially the intensive care units, are overwhelmingly unvaccinated. The story is even more striking if people get booster shots. This further reduces the risk of serious illness, especially for older people and those with serious health conditions.

We can see how this story plays out by looking at Israel, which has been very aggressive in pushing boosters. Its seven-day average for new cases is 410, which would be the equivalent of 14,800 cases a day in the United States. Its average for Covid deaths is 4, the equivalent of 144 a day in the United States.

We might like to see these numbers go to zero, but that is not going to happen. It’s also worth pointing out that Israel has its share of anti-vaxxers as well, so these figures are not coming from a fully vaccinated population. (Also, it is worth repeating that the whole world could have been vaccinated far more quickly if the United States and other rich countries had not insisted on maintaining patent monopolies for the vaccines.)   

Anyhow, if folks are vaccinated and get boosters, they can feel pretty well-protected against the pandemic. Those who have serious health issues will still be at some risk. Unfortunately, we have lots of loony tunes in this country whose definition of freedom means exposing these people to the pandemic, but thankfully most of us can now consider ourselves pretty safe in spite of these jerks.

 

Back to the Economy

With the booster rollout going at a pretty good pace, most people are getting back to normal and this shows up in the economic data. The 4.6 percent unemployment rate is still more than a percentage point higher than the pre-pandemic level, but already quite low by recent historical standards. We didn’t see an unemployment rate this low following the Great Recession until February of 2017.

In February, the Congressional Budget Office (CBO) projected that the unemployment rate would average 5.3 percent for the fourth quarter of this year. With the unemployment rate likely to fall further in November and December, we may average close to a full percentage point lower than the CBO projection for the full quarter.

The labor market has not looked so good, especially for workers at the bottom rung of the wage ladder, in more than fifty years. We just heard that weekly unemployment insurance claims for the week before Thanksgiving fell to 199,000, a level not seen since 1969 when the labor force was just half the current size.

Workers are quitting their jobs at record rates, especially in low-paying jobs like restaurant work. They feel confident that they can leave a job with low pay, bad working conditions, or an abusive boss, and find another one that is better.  

And, this is showing up in higher wages. The real average hourly wage (this is the wage increase in excess of price increases) for production and non-supervisory workers has risen by 2.1 percent over the last two years. For the lowest-paid workers, the increase has been even larger. For restaurant workers, the increase in real pay has been 7.6 percent. For workers in convenience stores, the average real pay increase has been 19.6 percent.

The higher pay and the option to leave bad jobs means a huge improvement in the lives of tens of millions of workers. This has to be a good Thanksgiving for these people and their families. In fact, many of these workers will actually be able to spend Thanksgiving with their families since, in response to the tight labor market, Target, Walmart and many other major retailers will not be open on Thanksgiving this year.

But What About Inflation?

As I noted earlier, the media have been on anti-inflation Jihad. This has included distorting and even making up data to push their case. Nonetheless, inflation has clearly jumped to levels that few would find acceptable, and if they were to rise still further, we would definitely have a serious problem on our hands.

I have been and remain in the camp that sees this jump as a temporary phenomenon. The world economy reopened in a big way in the last six months, after being largely shut down in 2020. This led to serious disruptions in supply chains, which were not prepared for all the items being pushed through, especially since the demand was disproportionately on the goods side.

Compounding the problem, we had a fire at a major semiconductor factory in Japan, which led to a worldwide shortage of semiconductors. This led to a shortage of cars since semiconductors are an important component in new cars. The car shortage has been a major source of inflation over the last year, with new vehicle prices up 9.8 percent over the last year and used vehicle prices up 26.4 percent.

There are good reasons for believing that these price hikes will be temporary. Rather than leading to accelerating inflation, they are more likely to be reversed in the months ahead. In the case of car prices, we are seeing a rapid expansion in semiconductor production, which is allowing major manufacturers like Ford and Toyota to return to their normal production schedule.

We are also likely to see a falloff in demand in the months ahead. People who bought a car in 2021 are not likely to buy another one in 2022. This will be true for a wide range of products that saw a surge in demand both because of the pandemic checks people received at the start of the year and because they could not spend money on services like restaurants and concerts due to the pandemic.

These factors are now behind us. Restaurant spending is now above its pre-pandemic level, although spending on other services has not yet returned to its early 2020 pace.

Also, the pandemic checks, the paycheck protection program, the supplemental unemployment insurance supplements, and other pandemic programs are all in the rearview mirror. This means that any excessive spending attributable to these programs is history. People are spending now based on their current income.

In this respect, it is worth noting that the savings rate as a share of disposable income for October was 7.3 percent, just a hair below the 7.5 percent average for the three years prior to the pandemic. This is a big deal since it means that, to date, we are not seeing evidence that people are spending down the savings they accrued during the pandemic.

This means that we have little reason to believe that we will be creating new stress on supply chains going forward. We have a backlog of items that have to be shoved through the supply chain, but new demand should be close enough to pre-pandemic levels that our supply chains should be able to deal with them.

There is some evidence that we are already seeing price declines in many of the items that had pushed up inflation earlier this year. For example, lumber futures, which typically traded in a range of $300 to $500 before the pandemic, soared to a peak of almost $1,700 in May. They then fell back to under $500 in August. (More recently, they have bounced up higher, but still have generally remained at prices that are less than half the May peak.)  

There is a similar story with a number of other commodities. The Baltic Dry Goods Index, which is a worldwide index of the spot prices for a number of widely traded commodities, soared earlier this year, peaking at over 5,500 at the start of October. Its more normal range would be between 1,400 and 1,600. In the last month and a half, it has fallen back sharply to 2,650.

It is worth noting that these price rises reflect worldwide conditions, not just the U.S. market. This point is important because other countries didn’t get the same boost to their recovery as we saw here with the American Recovery Plan (ARP) that President Biden pushed through Congress. This indicates that much of the inflation we are now seeing had little to do with the ARP, but rather was due to problems with reopening that would have been present regardless of the extent to which we boosted the U.S.  economy.

The other point is that the price declines recently seen for many commodities support the argument for the price burst being a temporary one, which will be reversed in many areas. I have used televisions as a canary in the coal mine for this story. After rising by 10.2 percent from March to August (a 26.3 percent annual rate), television prices have since fallen by 2.8 percent in the last two months. They still have a way to fall to get back to their March level, but my guess is that this decline will continue and that we will see a similar story with many other products that had pushed up inflation earlier this year.

There is one other point worth making on the temporary side. Contrary to the prediction of Larry Summers and other inflation hawks, the dollar has not fallen in value in the wake of the ARP. In fact, it has risen sharply. The dollar is up by almost 10.0 percent against the euro since the start of the year.

This matters not only because it suggests that financial markets don’t see a story of spiraling inflation (the continued low interest rate on 10-year Treasury bonds also supports the temporary story), but it also means that imports should be falling in price in the months ahead. To take a simple case, if a car or television set sells for the same price in euros in Germany or the Netherlands as it did at the start of the year, it would now cost 10 percent less in dollar terms.

As noted earlier, other countries have seen some issues with inflation as well, but if we assume that Biden’s ARP did not set off a worldwide inflationary spiral, these price increases will slow or reverse. At that point, we should be seeing cheaper imports coming into the United States. While imports typically have a limited impact on inflation in the U.S. (they are equal to a bit less than 15 percent of GDP), in this case, they account for a large share of the items that have been pushing up inflation. This means that lower-priced imports should be an important factor countering inflation here in the months ahead.  

 

The Labor Market and the Problem of Not Being Able to Get Good Help

The most important issue for the future course of inflation is what happens in labor markets. As noted earlier, many workers at the bottom end of the wage distribution have seen double-digit pay increases in the last year. This is great news for these workers, many of whom would have been living near the poverty level, especially if they were supporting children. (The $3,000 child tax credit, $3,600 for kids under age six, is also a huge deal.)

But double-digit pay increases are not sustainable in an environment of moderate inflation. If wage growth continues at that pace we have seen at the lower end of the wage distribution, we will certainly see serious problems with inflation going forward.

In fact, the situation is not so dire from the perspective of inflation. As Arin Dube has shown using data from the Current Population Survey, the rapid wage growth has been disproportionately at the bottom end of the wage distribution. Workers at higher points of the distribution have seen stagnant or even declining real wages.

This matters not only from the standpoint of seeing greater equality, but it also means there is less inflation pressure here than may first appear to be the case. When workers getting $100,000 or $200,000 a year get a ten percent pay increase, that means a big increase in labor costs in the economy.  When workers earning $20,000 a year get a ten percent pay increase, the impact on aggregate labor costs is much smaller.

This is largely the story we are seeing today. The occupations where real wages have been stagnant or declining over the past four decades have been seeing strong wage growth due to the tightness of the labor market. There is room for their pay to rise with a limited impact on inflation.

The price of the goods and services that these low-paid workers produce may rise, but so what? It may cost 10 percent more to get a cappuccino at Starbucks, but that is hardly an economic crisis. Truck drivers have seen their real pay fall by close to 30 percent since the 1970s. If we want enough truckers to move the country’s freight, their pay may have to return to 1970s levels, and maybe even go higher. 

These pay increases will mean reversing some of the upward redistribution of the last four decades. This is just the market working its magic.

Of course, if those at the top, including professionals like doctors and lawyers, as well as Wall Street types and high-level corporate executives, are able to exert their political power to ensure that they can still afford to get good help, then we will have an inflationary spiral. That battle is still several steps down the road. The fact that the media won’t even countenance a discussion of the impact of intellectual property on income distribution, or the corruption of corporate governance on CEO pay, is not encouraging.

But we can leave this one for another day. For this Thanksgiving, we can be happy that the tight labor market is allowing tens of millions of people to have much better pay and working conditions than they had before the pandemic.

Okay, I’m an economist nerd, so don’t expect a rundown of all the good things and bad things we have seen in the last year. I will focus on the economy, but I have to say a few words about the pandemic.

No one can be happy about the resurgence of case numbers this fall, but there is an important point worth recognizing. As public health experts have repeatedly said, this is now a pandemic of the unvaccinated. I realize that many people who have been vaccinated are still getting the virus (including me).

But the people filling the hospitals, and especially the intensive care units, are overwhelmingly unvaccinated. The story is even more striking if people get booster shots. This further reduces the risk of serious illness, especially for older people and those with serious health conditions.

We can see how this story plays out by looking at Israel, which has been very aggressive in pushing boosters. Its seven-day average for new cases is 410, which would be the equivalent of 14,800 cases a day in the United States. Its average for Covid deaths is 4, the equivalent of 144 a day in the United States.

We might like to see these numbers go to zero, but that is not going to happen. It’s also worth pointing out that Israel has its share of anti-vaxxers as well, so these figures are not coming from a fully vaccinated population. (Also, it is worth repeating that the whole world could have been vaccinated far more quickly if the United States and other rich countries had not insisted on maintaining patent monopolies for the vaccines.)   

Anyhow, if folks are vaccinated and get boosters, they can feel pretty well-protected against the pandemic. Those who have serious health issues will still be at some risk. Unfortunately, we have lots of loony tunes in this country whose definition of freedom means exposing these people to the pandemic, but thankfully most of us can now consider ourselves pretty safe in spite of these jerks.

 

Back to the Economy

With the booster rollout going at a pretty good pace, most people are getting back to normal and this shows up in the economic data. The 4.6 percent unemployment rate is still more than a percentage point higher than the pre-pandemic level, but already quite low by recent historical standards. We didn’t see an unemployment rate this low following the Great Recession until February of 2017.

In February, the Congressional Budget Office (CBO) projected that the unemployment rate would average 5.3 percent for the fourth quarter of this year. With the unemployment rate likely to fall further in November and December, we may average close to a full percentage point lower than the CBO projection for the full quarter.

The labor market has not looked so good, especially for workers at the bottom rung of the wage ladder, in more than fifty years. We just heard that weekly unemployment insurance claims for the week before Thanksgiving fell to 199,000, a level not seen since 1969 when the labor force was just half the current size.

Workers are quitting their jobs at record rates, especially in low-paying jobs like restaurant work. They feel confident that they can leave a job with low pay, bad working conditions, or an abusive boss, and find another one that is better.  

And, this is showing up in higher wages. The real average hourly wage (this is the wage increase in excess of price increases) for production and non-supervisory workers has risen by 2.1 percent over the last two years. For the lowest-paid workers, the increase has been even larger. For restaurant workers, the increase in real pay has been 7.6 percent. For workers in convenience stores, the average real pay increase has been 19.6 percent.

The higher pay and the option to leave bad jobs means a huge improvement in the lives of tens of millions of workers. This has to be a good Thanksgiving for these people and their families. In fact, many of these workers will actually be able to spend Thanksgiving with their families since, in response to the tight labor market, Target, Walmart and many other major retailers will not be open on Thanksgiving this year.

But What About Inflation?

As I noted earlier, the media have been on anti-inflation Jihad. This has included distorting and even making up data to push their case. Nonetheless, inflation has clearly jumped to levels that few would find acceptable, and if they were to rise still further, we would definitely have a serious problem on our hands.

I have been and remain in the camp that sees this jump as a temporary phenomenon. The world economy reopened in a big way in the last six months, after being largely shut down in 2020. This led to serious disruptions in supply chains, which were not prepared for all the items being pushed through, especially since the demand was disproportionately on the goods side.

Compounding the problem, we had a fire at a major semiconductor factory in Japan, which led to a worldwide shortage of semiconductors. This led to a shortage of cars since semiconductors are an important component in new cars. The car shortage has been a major source of inflation over the last year, with new vehicle prices up 9.8 percent over the last year and used vehicle prices up 26.4 percent.

There are good reasons for believing that these price hikes will be temporary. Rather than leading to accelerating inflation, they are more likely to be reversed in the months ahead. In the case of car prices, we are seeing a rapid expansion in semiconductor production, which is allowing major manufacturers like Ford and Toyota to return to their normal production schedule.

We are also likely to see a falloff in demand in the months ahead. People who bought a car in 2021 are not likely to buy another one in 2022. This will be true for a wide range of products that saw a surge in demand both because of the pandemic checks people received at the start of the year and because they could not spend money on services like restaurants and concerts due to the pandemic.

These factors are now behind us. Restaurant spending is now above its pre-pandemic level, although spending on other services has not yet returned to its early 2020 pace.

Also, the pandemic checks, the paycheck protection program, the supplemental unemployment insurance supplements, and other pandemic programs are all in the rearview mirror. This means that any excessive spending attributable to these programs is history. People are spending now based on their current income.

In this respect, it is worth noting that the savings rate as a share of disposable income for October was 7.3 percent, just a hair below the 7.5 percent average for the three years prior to the pandemic. This is a big deal since it means that, to date, we are not seeing evidence that people are spending down the savings they accrued during the pandemic.

This means that we have little reason to believe that we will be creating new stress on supply chains going forward. We have a backlog of items that have to be shoved through the supply chain, but new demand should be close enough to pre-pandemic levels that our supply chains should be able to deal with them.

There is some evidence that we are already seeing price declines in many of the items that had pushed up inflation earlier this year. For example, lumber futures, which typically traded in a range of $300 to $500 before the pandemic, soared to a peak of almost $1,700 in May. They then fell back to under $500 in August. (More recently, they have bounced up higher, but still have generally remained at prices that are less than half the May peak.)  

There is a similar story with a number of other commodities. The Baltic Dry Goods Index, which is a worldwide index of the spot prices for a number of widely traded commodities, soared earlier this year, peaking at over 5,500 at the start of October. Its more normal range would be between 1,400 and 1,600. In the last month and a half, it has fallen back sharply to 2,650.

It is worth noting that these price rises reflect worldwide conditions, not just the U.S. market. This point is important because other countries didn’t get the same boost to their recovery as we saw here with the American Recovery Plan (ARP) that President Biden pushed through Congress. This indicates that much of the inflation we are now seeing had little to do with the ARP, but rather was due to problems with reopening that would have been present regardless of the extent to which we boosted the U.S.  economy.

The other point is that the price declines recently seen for many commodities support the argument for the price burst being a temporary one, which will be reversed in many areas. I have used televisions as a canary in the coal mine for this story. After rising by 10.2 percent from March to August (a 26.3 percent annual rate), television prices have since fallen by 2.8 percent in the last two months. They still have a way to fall to get back to their March level, but my guess is that this decline will continue and that we will see a similar story with many other products that had pushed up inflation earlier this year.

There is one other point worth making on the temporary side. Contrary to the prediction of Larry Summers and other inflation hawks, the dollar has not fallen in value in the wake of the ARP. In fact, it has risen sharply. The dollar is up by almost 10.0 percent against the euro since the start of the year.

This matters not only because it suggests that financial markets don’t see a story of spiraling inflation (the continued low interest rate on 10-year Treasury bonds also supports the temporary story), but it also means that imports should be falling in price in the months ahead. To take a simple case, if a car or television set sells for the same price in euros in Germany or the Netherlands as it did at the start of the year, it would now cost 10 percent less in dollar terms.

As noted earlier, other countries have seen some issues with inflation as well, but if we assume that Biden’s ARP did not set off a worldwide inflationary spiral, these price increases will slow or reverse. At that point, we should be seeing cheaper imports coming into the United States. While imports typically have a limited impact on inflation in the U.S. (they are equal to a bit less than 15 percent of GDP), in this case, they account for a large share of the items that have been pushing up inflation. This means that lower-priced imports should be an important factor countering inflation here in the months ahead.  

 

The Labor Market and the Problem of Not Being Able to Get Good Help

The most important issue for the future course of inflation is what happens in labor markets. As noted earlier, many workers at the bottom end of the wage distribution have seen double-digit pay increases in the last year. This is great news for these workers, many of whom would have been living near the poverty level, especially if they were supporting children. (The $3,000 child tax credit, $3,600 for kids under age six, is also a huge deal.)

But double-digit pay increases are not sustainable in an environment of moderate inflation. If wage growth continues at that pace we have seen at the lower end of the wage distribution, we will certainly see serious problems with inflation going forward.

In fact, the situation is not so dire from the perspective of inflation. As Arin Dube has shown using data from the Current Population Survey, the rapid wage growth has been disproportionately at the bottom end of the wage distribution. Workers at higher points of the distribution have seen stagnant or even declining real wages.

This matters not only from the standpoint of seeing greater equality, but it also means there is less inflation pressure here than may first appear to be the case. When workers getting $100,000 or $200,000 a year get a ten percent pay increase, that means a big increase in labor costs in the economy.  When workers earning $20,000 a year get a ten percent pay increase, the impact on aggregate labor costs is much smaller.

This is largely the story we are seeing today. The occupations where real wages have been stagnant or declining over the past four decades have been seeing strong wage growth due to the tightness of the labor market. There is room for their pay to rise with a limited impact on inflation.

The price of the goods and services that these low-paid workers produce may rise, but so what? It may cost 10 percent more to get a cappuccino at Starbucks, but that is hardly an economic crisis. Truck drivers have seen their real pay fall by close to 30 percent since the 1970s. If we want enough truckers to move the country’s freight, their pay may have to return to 1970s levels, and maybe even go higher. 

These pay increases will mean reversing some of the upward redistribution of the last four decades. This is just the market working its magic.

Of course, if those at the top, including professionals like doctors and lawyers, as well as Wall Street types and high-level corporate executives, are able to exert their political power to ensure that they can still afford to get good help, then we will have an inflationary spiral. That battle is still several steps down the road. The fact that the media won’t even countenance a discussion of the impact of intellectual property on income distribution, or the corruption of corporate governance on CEO pay, is not encouraging.

But we can leave this one for another day. For this Thanksgiving, we can be happy that the tight labor market is allowing tens of millions of people to have much better pay and working conditions than they had before the pandemic.

INFLATION IN THE U.S. ECONOMY IS CLEARLY A PROBLEM. There, I said it in all caps so that everyone can see I recognize it as a problem. The question is how big a problem. After all, we have lots of problems, millions of children in poverty, a huge homeless population, parents without access to affordable childcare, among others.

But none of these other problems has gotten anywhere near the same amount of attention from the media in recent months as inflation. These pieces have often been quite openly dishonest. The nonstop hype of “inflation, inflation, inflation” unsurprisingly leads many people to believe inflation is a really big problem, even if their own finances are pretty good, because they hear all those wise reporters at CNN, NPR, the NYT and elsewhere telling them it’s a really big problem.

CNN’s Milk Story Goes Sour

Just to give a few of my favorite examples, let’s start with the milk hoarding family that CNN found, who was being bankrupted by the price of milk. According to CNN, the family was really pinched because the price of milk had gone from $1.99 a gallon to $2.79 a gallon, and they buy 12 gallons a week.

The first point that many folks seized on is that this family buys 12 gallons a week. I suppose there are families that drink this much milk, but they clearly are not typical. CNN is not informing us about the typical family when they find an extreme outlier, who for some reason drinks a huge amount of milk.

But the second point is probably more important. Where did they find milk prices going up by 80 cents a gallon, or slightly over 40 percent? The Consumer Price Index shows that milk prices are up 4.0 percent year over year. There are differences for types of milk and by region, but it’s hard to imagine that there is anywhere in the country where milk prices have risen by 40 percent over the last year.

Since we have the national data, we know this increase is not typical. So again, maybe CNN has uncovered some extreme outlier family who gets gouged at the store where they buy their milk, but why are they presenting their story as typical?

Finally, we have the other side of the picture, the family’s income. This has likely risen a great deal in the last year, especially if our milk drinkers are a low or moderate-income family, as the piece suggests. The average hourly wage for production and non-supervisory workers is up 5.8 percent over the last year. It’s up 10.3 percent if we want to go back two years.

The increases are even larger towards the bottom end of the wage distribution. The average hourly wage for non-supervisory workers in restaurants has risen 12.4 percent over the last year and 13.5 percent over the last two years. 

This means that the higher pay this family is getting is almost certainly swamping the impact of the rise in milk prices they are seeing. Yet, somehow CNN wants to tell us this family is being crushed by higher milk prices.

CNN also failed to mention the child tax credit. The child tax credit was increased from $2,000 a year in 2020 to $3,000 a year in 2021, with the credit for children under age 6 rising to $3,600. Furthermore, this credit is fully refundable, the limit on refundability for the prior credit was $1,400.

Since these big milk drinkers presumably have lots of kids, their additional income from the child tax credit should dwarf the impact of higher milk prices. In short, CNN’s story of low and moderate-income families being derailed by higher milk prices had no basis in reality.

 

The New York Times Is a Gas on Inflation

The New York Times decided to tell us that we are all suffering because of higher gas prices, running a piece saying that no one can afford to visit their family this Thanksgiving. As with the CNN milk piece, there is no mention of wage increases that most workers have seen since the pandemic began, especially those towards the bottom end of the wage ladder.

But, like CNN with milk, the NYT also plays silly tricks with gas prices. It tells readers:

“Millions of American drivers have acutely felt the recent surge in gas prices, which last month hit their highest level since 2014. The national average for a gallon of gas is $3.41, which is $1.29 more than it was a year ago, according to AAA.”

Well, last year the United States and the rest of the world were in the early stages of recovering from worldwide shutdowns that sent the prices of gas plummeting. If we go back two years ago, the Energy Information Agency puts the average price of a gallon of gasoline at $2.61 compared to the current $3.39. This means the current price is an increase of 78 cents a gallon or 29.9 percent.

That’s not trivial, but considerably smaller than the comparison to last year. A typical person drives their car roughly 10,000 miles a year, which means that if they get 20 miles a gallon, they buy 10 gallons a week. Higher gas prices would cost then cost them $7.80 a week.

If we go back to 2018, the average price of a gallon of gas was $2.75 in November. This means that a typical driver would be spending $6.40 more on gas a week compared to 2018 when their pay was considerably lower.

The NYT also managed to find the gas-guzzling equivalent of CNN’s milk hoarding family.

“Aldo McCoy, who owns an auto repair shop in Toms River, watched the numbers on a gas pump flash higher Wednesday as he filled up the tank of his 1963 Chevrolet Impala. He recalled recently filling his 2003 Cadillac Escalade and seeing the price go above $100, where it used to be $45.

“Mr. McCoy said he and his staff were working more than 15 hours of overtime each week to compensate for the extra money they spent on gas. He has also cut back on his household spending.”

Perhaps Mr. McCoy really does use a huge amount of gas, but then he is a very atypical person. If he is actually working an extra 15 hours a week to cover gas costs, this would come to over $105 a week at the minimum wage. If he and his staff get $20 an hour on average, the extra 15 hours would be $300 a week.

That additional income would be enough to cover the added cost of more than 230 gallons a week when measured against last year’s prices. It would be enough to cover the added cost of almost 470 gallons a week when measured against 2018 prices.

Readers of course have no idea how much Mr. McCoy actually drives, or what he drives, but if he buys hundreds of gallons of gas a week his expenses are very far from being representative of a typical American family.

National Public Radio Drains the Reserves to Trash Biden

NPR interviewed Tony Fratto, Deputy Press Secretary to George W. Bush. He told listeners why drawing down the strategic oil reserves to lower gas prices was a bad idea. The piece began with the cheap trick used by the New York Times, making a comparison between this year’s gas prices and last year’s pandemic depressed gas prices.

It then let Fratto make a number of misleading or inaccurate assertions without any pushback. First of all, Fratto neglected to mention that the release of reserves was being coordinated with China, Japan, and several other countries, which will make the impact on world oil markets considerably larger. Such a coordinated release likely would not have been possible with our prior “America First” president.

While Fratto trivialized the impact of another 700,000 barrels a day of oil on world markets, in fact, losses of oil of comparable amounts have often had a noticeable impact in prior years, such as when Libyan oil production dropped off due to its civil war. In the short run, demand for oil is highly inelastic (meaning it does not respond much to changes in price) so even limited changes in supply can have a substantial impact on prices.

Fratto also claimed that dipping into reserves to affect prices is extraordinary. In fact, many presidents have dipped into reserves to limit price increases, including President George H.W. Bush at the start of the first Iraq War and President George W. Bush after Hurricane Katrina idled capacity in Louisiana. The decision by President Biden to tap reserves to smooth markets as the economy recovers from a worldwide pandemic is very much in keeping with past practices.

The Media Has Decided Inflation is The Issue and Will Not Let the Data Get in the Way

We are likely to see many more stories along these lines in the weeks and months ahead as the media seem determined to say that inflation is the crisis of the century, no matter how much they have to abuse the data to make this point. They should be embarrassed to run pieces like the ones above, but unfortunately, shame has no place in policy discussions these days.

As I said at the beginning, inflation is a problem, but we need to look at the issue with clear eyes. There are good reasons for believing that many of the price increases we have seen in recent months are temporary and will be reversed. This is most notable with new and used cars, but also with many other items.

The spending-induced pandemic checks and unemployment insurance supplements are behind us. Saving rates are at normal levels, meaning that people are not spending down their accumulated wealth to any significant extent. If we can continue to bring the pandemic under control with vaccines and other measures, we can look forward to pretty clear sailing with the economy.  

INFLATION IN THE U.S. ECONOMY IS CLEARLY A PROBLEM. There, I said it in all caps so that everyone can see I recognize it as a problem. The question is how big a problem. After all, we have lots of problems, millions of children in poverty, a huge homeless population, parents without access to affordable childcare, among others.

But none of these other problems has gotten anywhere near the same amount of attention from the media in recent months as inflation. These pieces have often been quite openly dishonest. The nonstop hype of “inflation, inflation, inflation” unsurprisingly leads many people to believe inflation is a really big problem, even if their own finances are pretty good, because they hear all those wise reporters at CNN, NPR, the NYT and elsewhere telling them it’s a really big problem.

CNN’s Milk Story Goes Sour

Just to give a few of my favorite examples, let’s start with the milk hoarding family that CNN found, who was being bankrupted by the price of milk. According to CNN, the family was really pinched because the price of milk had gone from $1.99 a gallon to $2.79 a gallon, and they buy 12 gallons a week.

The first point that many folks seized on is that this family buys 12 gallons a week. I suppose there are families that drink this much milk, but they clearly are not typical. CNN is not informing us about the typical family when they find an extreme outlier, who for some reason drinks a huge amount of milk.

But the second point is probably more important. Where did they find milk prices going up by 80 cents a gallon, or slightly over 40 percent? The Consumer Price Index shows that milk prices are up 4.0 percent year over year. There are differences for types of milk and by region, but it’s hard to imagine that there is anywhere in the country where milk prices have risen by 40 percent over the last year.

Since we have the national data, we know this increase is not typical. So again, maybe CNN has uncovered some extreme outlier family who gets gouged at the store where they buy their milk, but why are they presenting their story as typical?

Finally, we have the other side of the picture, the family’s income. This has likely risen a great deal in the last year, especially if our milk drinkers are a low or moderate-income family, as the piece suggests. The average hourly wage for production and non-supervisory workers is up 5.8 percent over the last year. It’s up 10.3 percent if we want to go back two years.

The increases are even larger towards the bottom end of the wage distribution. The average hourly wage for non-supervisory workers in restaurants has risen 12.4 percent over the last year and 13.5 percent over the last two years. 

This means that the higher pay this family is getting is almost certainly swamping the impact of the rise in milk prices they are seeing. Yet, somehow CNN wants to tell us this family is being crushed by higher milk prices.

CNN also failed to mention the child tax credit. The child tax credit was increased from $2,000 a year in 2020 to $3,000 a year in 2021, with the credit for children under age 6 rising to $3,600. Furthermore, this credit is fully refundable, the limit on refundability for the prior credit was $1,400.

Since these big milk drinkers presumably have lots of kids, their additional income from the child tax credit should dwarf the impact of higher milk prices. In short, CNN’s story of low and moderate-income families being derailed by higher milk prices had no basis in reality.

 

The New York Times Is a Gas on Inflation

The New York Times decided to tell us that we are all suffering because of higher gas prices, running a piece saying that no one can afford to visit their family this Thanksgiving. As with the CNN milk piece, there is no mention of wage increases that most workers have seen since the pandemic began, especially those towards the bottom end of the wage ladder.

But, like CNN with milk, the NYT also plays silly tricks with gas prices. It tells readers:

“Millions of American drivers have acutely felt the recent surge in gas prices, which last month hit their highest level since 2014. The national average for a gallon of gas is $3.41, which is $1.29 more than it was a year ago, according to AAA.”

Well, last year the United States and the rest of the world were in the early stages of recovering from worldwide shutdowns that sent the prices of gas plummeting. If we go back two years ago, the Energy Information Agency puts the average price of a gallon of gasoline at $2.61 compared to the current $3.39. This means the current price is an increase of 78 cents a gallon or 29.9 percent.

That’s not trivial, but considerably smaller than the comparison to last year. A typical person drives their car roughly 10,000 miles a year, which means that if they get 20 miles a gallon, they buy 10 gallons a week. Higher gas prices would cost then cost them $7.80 a week.

If we go back to 2018, the average price of a gallon of gas was $2.75 in November. This means that a typical driver would be spending $6.40 more on gas a week compared to 2018 when their pay was considerably lower.

The NYT also managed to find the gas-guzzling equivalent of CNN’s milk hoarding family.

“Aldo McCoy, who owns an auto repair shop in Toms River, watched the numbers on a gas pump flash higher Wednesday as he filled up the tank of his 1963 Chevrolet Impala. He recalled recently filling his 2003 Cadillac Escalade and seeing the price go above $100, where it used to be $45.

“Mr. McCoy said he and his staff were working more than 15 hours of overtime each week to compensate for the extra money they spent on gas. He has also cut back on his household spending.”

Perhaps Mr. McCoy really does use a huge amount of gas, but then he is a very atypical person. If he is actually working an extra 15 hours a week to cover gas costs, this would come to over $105 a week at the minimum wage. If he and his staff get $20 an hour on average, the extra 15 hours would be $300 a week.

That additional income would be enough to cover the added cost of more than 230 gallons a week when measured against last year’s prices. It would be enough to cover the added cost of almost 470 gallons a week when measured against 2018 prices.

Readers of course have no idea how much Mr. McCoy actually drives, or what he drives, but if he buys hundreds of gallons of gas a week his expenses are very far from being representative of a typical American family.

National Public Radio Drains the Reserves to Trash Biden

NPR interviewed Tony Fratto, Deputy Press Secretary to George W. Bush. He told listeners why drawing down the strategic oil reserves to lower gas prices was a bad idea. The piece began with the cheap trick used by the New York Times, making a comparison between this year’s gas prices and last year’s pandemic depressed gas prices.

It then let Fratto make a number of misleading or inaccurate assertions without any pushback. First of all, Fratto neglected to mention that the release of reserves was being coordinated with China, Japan, and several other countries, which will make the impact on world oil markets considerably larger. Such a coordinated release likely would not have been possible with our prior “America First” president.

While Fratto trivialized the impact of another 700,000 barrels a day of oil on world markets, in fact, losses of oil of comparable amounts have often had a noticeable impact in prior years, such as when Libyan oil production dropped off due to its civil war. In the short run, demand for oil is highly inelastic (meaning it does not respond much to changes in price) so even limited changes in supply can have a substantial impact on prices.

Fratto also claimed that dipping into reserves to affect prices is extraordinary. In fact, many presidents have dipped into reserves to limit price increases, including President George H.W. Bush at the start of the first Iraq War and President George W. Bush after Hurricane Katrina idled capacity in Louisiana. The decision by President Biden to tap reserves to smooth markets as the economy recovers from a worldwide pandemic is very much in keeping with past practices.

The Media Has Decided Inflation is The Issue and Will Not Let the Data Get in the Way

We are likely to see many more stories along these lines in the weeks and months ahead as the media seem determined to say that inflation is the crisis of the century, no matter how much they have to abuse the data to make this point. They should be embarrassed to run pieces like the ones above, but unfortunately, shame has no place in policy discussions these days.

As I said at the beginning, inflation is a problem, but we need to look at the issue with clear eyes. There are good reasons for believing that many of the price increases we have seen in recent months are temporary and will be reversed. This is most notable with new and used cars, but also with many other items.

The spending-induced pandemic checks and unemployment insurance supplements are behind us. Saving rates are at normal levels, meaning that people are not spending down their accumulated wealth to any significant extent. If we can continue to bring the pandemic under control with vaccines and other measures, we can look forward to pretty clear sailing with the economy.  

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