Opinion | Why markets drew on bad inflation news

There are a lot of other factors that should curb inflation, but which are not yet reflected in government reports. Official estimates of housing costs tend to lag well behind the listed rents, so they are only now catching up with the big increase in 2021 and will not reflect moderating rents for a while. Shipping costs have dropped and in general it seems that supply chain problems are easing.

So we should get some short-term inflation reductions starting more or less now. And there are two major reasons to expect that the forthcoming slowdown in inflation will continue.

First, while we continue to hear ominous warnings about a wage-price spiral, it is difficult to deal with if wages refuse to spiral. And the growth rate of the average wage has actually been more slowly, from about 6 percent at the beginning of this year to about 4 percent now. It’s still a bit too high to be in line with the Fed’s target of 2 percent inflation, but not much.

Second, while the Fed is trying to fight inflation by raising interest rates, we should not expect to see much, if any, benefit from this effort yet. The long-term interest rates, which are what matter to the real economy and reflect both current Fed policy and expectations for future policy, only really took off in March. And no one, but no one, should have thought that this rise in interest rates would have a noticeable effect on inflation in just under three to four months.

That is, if the Fed’s change in policy is going to bring inflation down, it will all happen in the future. The markets believe that the Fed will limit inflation, and so do I; but June’s consumer price report tells you nothing, either way, whether we’re right. It’s just too early.

So the message we get from the markets – a message backed by a lot of data that has not yet reached official consumer prices – is, do not panic. Inflation is actually not out of control, even though the pain many consumers are feeling right now is.

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