Inflation forecasts were wrong last year. Should we believe them now?


This time last year, economists were hoping global transportation and manufacturing problems would soon ease; consumer spending would shift away from goods and back to services; and the combination would allow supply and demand to rebalance, slowing price increases on everything from cars to sofas. It happened, but only gradually. It also took longer to translate into lower consumer prices than some economists had expected.

But the expected change is finally showing up, albeit belatedly. After months of supply chain healing, consumers are now starting to feel the benefits. Used car prices have started to drop significantly in October inflation data, furniture prices are crashing and clothing prices are falling. Similar cost cuts are expected to weigh on inflation next year.

“It is far too early to declare that goods inflation is defeated, but if current trends continue, goods prices should start to put downward pressure on headline inflation in the coming months,” Fed Chairman Jerome H. Powell said in a recent speech.

Unfortunately, moderating goods prices would probably not be enough to bring America back to a normal rate of inflation, as the rise in services prices has accelerated. This category – which covers everything from meals to monthly rent – ​​accounted for half of consumer price inflation in October, according to a Bloomberg breakdown, up from less than a third a year earlier.

Many types of services inflation are closely linked to what happens in the labor market. For businesses, including hair salons, restaurant chains, and tax accountants, paying employees is usually a major, if not the biggest, cost of doing business. When workers are scarce and wages are rising rapidly, companies are more likely to raise prices to try to cover higher labor bills.

This means that today’s very low unemployment rate and abnormally rapid wage growth could help sustain price increases faster than usual, even if the labor market has not been a big driver. the initial surge in inflation.

This is where Fed policy could come into play. Companies can only charge more if their customers are able – and willing – to pay more. The Fed can stop this chain reaction by raising interest rates to slow demand.



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