September 03, 2024
Peter Coy had a somewhat bizarre column in the New York Times yesterday warning us that even though we have gotten rid of most of the pandemic inflation with little rise in unemployment, “any further decline in inflation may not be as painless.” The column highlights a new paper by Gauti Eggertsson, one of the nation’s leading macroeconomists.
Whether or not Eggertsson’s theoretical analysis is correct, it is beside the point in terms of the current economy. We don’t need any further decline in inflation because we have already hit the Fed’s 2.0 percent target.
If it seems I am getting ahead of the game, you have to look at the data more closely. It’s true that the year over year rate in the Personal Consumption Expenditure deflator (PCE) stands a 2.5 percent, which is above the Fed’s 2.0 percent target, but we can look a bit around the corner here.
We know with virtual certainty that the rental indexes (rent proper and owners’ equivalent rent) will be showing much lower inflation in future months. The reason we can be certain of this fact is that the Bureau of Labor Statistics publishes a “New Tenant Rent Index” which tracks rents in units that change hands.
This index leads the overall rent indexes, since they are dominated by leases that could have been signed 1-3 years ago. These leases eventually end and are negotiated in ways that reflect current market conditions.
This New Tenant Rent Index has been showing sharply lower rental inflation. In fact over the last year it actually fell by 1.1 percent. This index is relatively new, so we can’t say with much precision how quickly the overall rental indexes will adjust to it or the extent to which they will adjust, but we can be quite certain that rental inflation will continue to slow, as it has for over a year.
Year over year rental inflation is currently 5.2 percent. Suppose it falls to 2.0 percent. Since these indexes comprise roughly 15 percent of the PCE deflation, this drop of 3.2 percentage points would lower the inflation rate by roughly 0.5 percentage points, bringing us to the Fed’s 2.0 percent inflation target.
Even if we take a much more modest scenario and say rental inflation falls to 3.0 percent, that still gets us to 2.2 percent, which is close enough to 2.0 percent that no serious person would spend a lot of time worrying about the difference.
Still not convinced? The annualized inflation rate over the last three months was 0.9 percent. The annualized inflation rate for the core index was 1.7 percent.
This inflation battle is over and won. Eggertsson’s work may have some useful insights for the next war on inflation, but it’s too late to be of any help in the last one.
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