A Skip, Not a Stop

Something Worked
“A Whole New Economic Playing Field”
Nebulous Target
Root Cause: Fantasy
Cancun, Memphis, Dallas, Europe, and Paris

A year ago, the US Consumer Price Index was rising at an almost 9% annual rate. The Federal Reserve was trying to change that trend with tighter policy. But it wasn’t just the Fed. All of us—businesses, consumers, everyone—responded to the pain.

Good news: Our collective decisions seem to have had the desired effect. Annual CPI inflation dropped to 4.1% as of May and the last few months seem to be pointing even lower. The Producer Price Index is similarly retreating, which might reduce some of the cost pressures which lead to higher consumer prices.

On Wednesday the Fed sent a confident signal by declining the opportunity to raise rates again. But no one should think the rate hikes are over. I expect Jerome Powell, who has now defined his legacy as an inflation fighter (at least in his own mind), to respond swiftly and aggressively if inflation starts moving higher again.

Yet in one sense, Powell doesn’t have to “respond.” Simply keeping rates where they already are is additional tightening that should reduce or at least stabilize inflation. The problem is that various measures of inflation conflict. One says the Fed should stop raising rates and others suggest we may need more rate increases, or at a minimum higher for longer. Today I’ll explain how that works and what it means for inflation and interest rates.