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Yes, inflation in the U.S. has indeed decreased. We track inflation primarily through two measures: the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) index. The Federal Reserve prefers the PCE for guiding monetary policy, and currently, the PCE is showing a more favorable trend than the CPI. Both indices, however, indicate that the rate of price increases over the past year has slowed significantly compared to the peak levels of 2022.
Although there was a reported uptick in inflation in early 2024, recent data suggests this was just statistical noise. Financial markets, through mechanisms like inflation swaps, are projecting an inflation rate of just 2.1% over the next year. Clearly, inflation has decreased from its previous highs. Despite this, many Americans remain skeptical, and some prominent commentators argue that inflation hasn't improved. Where does this disbelief, or disinflation denial, come from?
We've seen similar sentiments before. After the 2008 financial crisis, the Federal Reserve's quantitative easing led some to predict runaway inflation, which never materialized. These "inflation truthers" continued to insist that the numbers were false. Today, these doubters have returned in various forms. Let’s explore the different facets of disinflation denial and why they're incorrect.
Confusing Price Levels with Inflation
A common misunderstanding involves conflating the level of prices with inflation, which is the rate at which prices change. For instance, grocery prices have risen about 25% over the past few years, and while they remain high, the rate of increase has dropped drastically—from double digits in 2022 to just over 1% recently. This significant reduction is what economists refer to when they say inflation is down. Some people may wish prices would return to early 2020 levels, but attempting to achieve this could be detrimental. The confusion here is relatively innocent.
Misconceptions About Inflation Measurement
Another source of denial stems from the belief that official inflation measures exclude essential goods like food and gasoline, thus not reflecting the true cost of living. This misconception arises from the use of "core" inflation, which excludes food and energy prices for analytical purposes. This practice started with a 1975 paper by economist Robert Gordon, who distinguished between transitory price shocks and entrenched "hard-core" inflation.
While this method was reasonable initially, the disruptions caused by COVID-19 have led to more transitory price changes than usual. However, traditional core inflation remains a useful measure, and arguments to exclude even more items can be problematic. They risk cherry-picking data to fit desired narratives.
A more accurate way to measure inflation could be through Multivariate Core Trend inflation. This method uses a statistical algorithm to create a more flexible measure of core inflation, reducing the risk of biased interpretations since it’s free from human influence.
Conspiracy Theories and Disinformation
At the extreme end of inflation denial are conspiracy theories, such as claims that the Bureau of Labor Statistics (BLS) fakes inflation numbers. For example, false rumors have circulated that the BLS excluded coffee from the CPI to benefit President Biden. In reality, faking such detailed data would require widespread corruption, which is not the case.
Independent indicators, like surveys from purchasing managers and the Atlanta Fed, align closely with official inflation data, further validating its accuracy. While there’s a valid debate on how close we are to the Federal Reserve's 2% inflation target and the challenges of reaching it, denying the substantial reduction in inflation is unfounded.
At Kaizen Financial Advisors, LLC, we strive to provide clear and accurate financial insights. If you have any questions or need further information, our team is here to help.
To Your Prosperity,
The Team at Kaizen Financial Advisors, LLC
Source: Opinion | Return of the Inflation Truthers - The New York Times (nytimes.com)
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