INFLATION CLOCKS IN AT 3.1%. HERE'S WHY YOU DON'T NEED TO FREAK OUT

Just a few days ago, the Bureau of Labor Statistic (BLS) released its inflation report detailing what went on with the average price level during the month of January. According to the report, the average price level—as measured by the Consumer Price Index (CPI)— is currently increasing at an annual rate of 3.1%. Economic Cassandras had been predicting that the most recent estimate of annual inflation would clock in at 2.9%. In other words, the prognosticators were off by 0.2 percentage points.

A whole 0.2 percentage points! That’s hardly a difference worth losing much sleep about.

Why? Well, first off, let’s put that 3.1% figure in context. What that figure says is that prices rose 3.1% in January compared to the year before. The figure for the previous month, December 2023, came in at 3.4% — that is, prices in December 2023 rose 3.4% compared to the year before. In other words, the annual rate of inflation actually declined from 3.4% to 3.1%. The average price level is increasing but at a decreasing rate.

That’s exactly what a decline in inflation looks like— a slowdown in the rate of increase. A decline in inflation means that, on average, price increases are slowing down, not that they’re reversing.

Secondly, here’s another reason for not freaking out: Inflation peaked at 9.1% in June 2022. That’s a whopping 66% lower than the recent estimate of 3.1%. Back then— that is, in June 2022— the average price level was clocking in at 9% on an annualized basis; now, it’s still increasing at the substantially lower rate of 3% per annum.

And, at the risk of being redundant, it needs to be reiterated that this is exactly what a decline in inflation means: An average price level that’s increasing at a decreasing rate.

More generally, it seems to me that political-economist Robert Kuttner is on point when he writes:

For starters, the supply-chain inflation of the pandemic era is over. Inflation for all of 2023 was just 3.1 percent. Getting it all the way down to the Fed's target of 2 percent could take a while longer. But 2 percent is an arbitrary benchmark. For long periods of time, the economy has done just fine with inflation of 3 percent or even more. It makes no sense to use high interest rates to keep the economy from realizing its full potential just to hit an unrealistic inflation target.

None of this, of course, means that everything is copacetic. The prices of some goods and services are rising faster than the overall inflation rate of 3.1% per annum. The cost of housing or shelter is climbing at an annual rate of 6%, almost twice as high as the overall rate. That’s clearly putting the squeeze on the budgets of many households, especially those located and stuck on the lower ends of the income and wealth spectrum.

While the high and rising price of shelter is a problem, it’s still important to put that current rate of increase of 6% per annum in a broader context: That rate is down from the previous report’s estimate of 6.2%. In fact, the rate of increase in the cost of shelter has been declining for ten straight months since March’s 2023 peak of 8.2%.

When it comes to the cost of shelter, the fundamental problem is that this county does a shabby job at ensuring that all persons have access to safe, high quality, and affordable housing, especially for the most economically vulnerable households. A recent study, for instance. that there are only “33 affordable and available rental homes…for every 100 low-income renter households.”

That same study goes on to state:

Extremely low-income renters face a shortage in every state and major metropolitan area. Among states, the supply of affordable and available rental homes ranges from 17 affordable and available homes for every 100 extremely low-income renter households in Nevada to 58 in South Dakota. In 12 of the 50 largest metropolitan areas in the country, the absolute shortage of affordable and available homes for extremely low-income renters exceeds 100,000 units. 

The high price of rent, then, is largely due to the country’s long-standing failure to assure the existence of a supply of housing that’s sufficient to meet the shelter needs of the population located at the lower ends of the income and wealth spectrum. It’s this scarcity of affordable housing that’s putting upward pressure on rents and causing it to increase faster than the average rate of inflation. The solution to this situation is to increase the supply of affordable housing (especially for low and middle income households) which, in turn, can put downward pressure on rents.

This is precisely the point made by researchers Christian E. Weller and Lily Roberts:

The housing crisis requires more affordable rental housing as well as protection for low-income people. The federal government has a plethora of programs and resources at its disposal dedicated to housing security and economic mobility. The administration and Congress have several tools available to help struggling renters. They can increase the supply of affordable and accessible housing while also providing housing allowances to those who need them, particularly low income households, and other marginalized people, and protect tenants facing evictions, thus increasing overall housing security for renters.

IN CLOSING

So, here’s the deal: Although the price level is high, we need to refute the dangerous argument that it—inflation— is out of control like some kind of raging fire. It’s dangerous because it plays into, even if inadvertently, the narrative that spending cuts, along with the maintenance of high interest rates, are necessary to wring inflation out of the system. It’s also misleading because, in fact, we’re experiencing disinflation— a slowdown in the rate at which the price level is increasing.

Not only should we tell the more accurate story of disinflation, we can—and should— do this without dismissing the fact that the prices of some goods and services—like rent— are running well above the 3% average (even though the cost of shelter, like the average price level, is increasing at a decreasing rate). With respect to such goods as housing, we ought to continue to organize and push policies that’ll increase the supply of shelter. And we need to express our solidarity with the most economically pressed by a willingness to go to the mat for increased financial assistance—and protection— for those who are being hit disproportionately hard by the shortage in safe, affordable, and accessible housing.

There’s a lot to be done, and a lot at stake. And there’s no doubt that there’ll be push back from the all the apostles of austerity who’ll continue their campaign to use a fear of a non-existent runaway inflation to strip the state bare of social spending and to further redistribute wealth upward.

Now ain’t the time to freak out.

Catch you on the rebound,

Doc Greene