Paul Krugman’s pathetic inflation victory lap
Tiana Lowe Doescher
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Guess what? Nobel laureate Paul Krugman discovered that if you strip out food, energy, housing, and used cars from the consumer price index and then calculate the six-month change at an annualized rate, this inflation rate falls just a hair short of the Federal Reserve’s maximum 2% target rate. The battle is over, guys! Just as long as you strip away all of the essentials that comprise the bulk of the working class’s budget from an incredibly doctored inflation rate.
What do the actual inflation prints tell us? According to the consumer price index release from Thursday, headline CPI inflation rose by 0.4 points last month and 3.7% in the year ending in September. Core CPI — that is, CPI sans the volatile categories of food and energy — rose by 0.3 points last month and 4.1% in the year ending in September. Our latest personal consumption expenditures release showed that headline PCE inflation rose by 0.4 points in August and 3.5% in the year ending in August. The Fed’s preferred inflation measure of core PCE rose by 0.1 points in August and 3.9% in the year ending in August.
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We will know more when September’s PCE release is published, but we can deduce a decent amount from just this data. While inflation has clearly slowed from its near-double-digit highs of last summer, disinflation has decelerated, with inflation still about twice as high as the central bank considers tolerable. Overall prices, which have risen more than 17% since President Joe Biden took office, have not undergone any deflation, which is an actual reduction in prices.
When the White House created the worst inflationary crisis in 40 years through $5 trillion in pandemic spending and now a 7% deficit-to-GDP ratio, the Fed stepped in to do what the White House wouldn’t. And now that the Fed is fearful of overshooting and missing a soft landing, the bond markets are doing what the Fed won’t and forcing the deepest bond market rout in perhaps the history of U.S. Treasurys.
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Paul Krugman may wish to proclaim victory over inflation, and the Fed probably will not, but theoretically could agree. As evidenced by 10-year Treasurys exploding to near 5% yields, the bond market will still force Uncle Sam to reckon with real inflation expectations and pay the price when they continue to recklessly borrow, regardless of what government economists insist on believing.