September 22, 2023
Catherine Rampell had an interesting column dealing with the question of when prices will “come back down?” Rampell correctly answered “never,” but I am not convinced this is the real question people are posing.
Rampell deals with the question as being one about the overall Consumer Price Index (CPI). She is explicitly not talking about the price of the everyday items, like food and gas, that people purchase regularly.
This distinction is my reason for skepticism. First, the price of many food items has come back down. Overall food prices have not, but it actually is plausible that we will see further declines in the food basket.
The prices of most commodities, like wheat and corn, are pretty much back to their pre-pandemic level. Shipping costs have also fallen back to roughly pre-pandemic levels. And, corporations are complaining that they are losing some of the pricing power that they had during the pandemic.
All of this translates into a picture where the rate of inflation in food prices may drop further (the annual rate was 1.6 percent over the last three months) and could possibly turn negative. I doubt that food prices will fall back to pre-pandemic levels, but we may see the overall index decline for a period of time.
We see a different picture with gas prices. Production cutbacks by Saudi Arabia (was there a “perfect phone call” from Donald Trump?) have sent crude oil prices from $70 a barrel to $90 a barrel, raising gas prices back to almost $3.90 a gallon as a nationwide average.
However, it is plausible that these prices will fall again. For better or worse (obviously worse from a climate perspective), U.S. oil production is at a record high. Exploding growth in the EV market, especially in China and Europe, will reduce demand. Maybe Saudi Arabia will respond with further cuts (I don’t have a crystal ball), but it is not absurd to think that gas prices will come back down.
Anyhow, the point here is that the prices that are most directly in people’s faces can come back down. When we move beyond these prices to items like rent, owners’ equivalent rent (the rent you would pay yourself for living in a home you own), and new car purchases, I’m not sure that these fit well into most people’s conceptions of inflation.
Owners’ equivalent rent accounts for over a quarter of the CPI, do the two-thirds of households who own their home actively think about how much it would cost them to rent the place? Most people rarely buy a new car, and even used car purchases are not frequent (used car prices have been falling over the last year).
I also doubt that many people other than economists and people who write on economics have a clear vision of the overall CPI or the price index of their choosing. For this reason, I’m not sure that many people really expect prices to come back down. Average hourly wages have risen by almost 20 percent since the start of the pandemic, do people really expect that they will pay the same for stuff as they did in 2019?
It is also worth noting that prices never came back down in the 1980s. Ronald Reagan was singing about “Morning in America” in his 1984 re-election campaign when inflation was still over 4.0 percent.
My guess here is that the concern for prices coming back down is being fueled by the Fox News gang and their allied politicians. This is a theme they endlessly tout. I know this because Elon Musk has decided that I have to see the tweets of every right-wing politician and pundit in the country in my Twitter feed. (I have blocked most of them, but I still see plenty.)
As is often the case, Fox can have a huge impact on the national political agenda. We see this all the time, most obviously with the absurdity around Biden’s impeachment. Months of extensive investigation have produced absolutely nothing in terms of serious evidence and shot down most of the right-wing theories of President Biden’s corruption. Yet, the House is prepared to move forward, and close to half the country actually says they think there is a plausible basis for impeachment.
Anyhow, we know that Fox and its friends endlessly harp on out-of-control inflation. This may not correspond to reality, but that is not a big factor for many people. In short, I don’t think the issue is whether inflation will flip over to deflation, the question Rampell addresses, I think the issue is when, if ever, the right stops whining about inflation.
The Myths of Deflation
As long as we’re on the topic, I want to beat up on one of the myths about the problem of deflation. Rampell repeats the widely circulated story that when we see deflation, like what Japan had in the 1990s and 2000s, consumers will delay their purchases, leading to less demand and a weak economy.
I’m afraid this story does not make much sense. Deflation peaked in Japan at around a 1.0 percent annual rate, but it usually was a smaller decline. Would people really delay buying a $40 shirt or pair of pants because it might cost 20 cents less in six months? Even with a big-ticket item like a $30,000 car, would it make sense to delay the purchase six months to save $150?
Also, focusing on the overall index misses the fact that when inflation is close to zero the prices of many items are already falling. In fact, car prices often fell here in the decades before the pandemic, even as the overall inflation rate was positive. If the inflation rate falls from a rate of positive 1.0 percent to negative 1.0 percent, it just means that the balance of items with falling prices has increased.
There is a plausible story that falling prices hurt investment. If an auto manufacturer is looking to build a new factory, it is asking about how much it can expect to sell its cars for over the next ten or twenty years. If it believes that prices will be lower five or ten years out, then it will be less likely to build the factory.
For this reason, we can certainly tell the story that deflation would be bad news for the economy, but it is bad news in the same way that 1.0 percent inflation is worse than 2.0 percent inflation, crossing the zero mark means nothing. (We could tell a story of a deflationary spiral, but Japan never saw anything like that, nor has almost anyone else since the start of the Great Depression.) In short, deflation can be bad, but only in the same way, that very low inflation can be bad. Zero is not the problem.