Do people really expect prices to return to pre-pandemic levels?

Katherine Rumpel had an interesting column dealing with the question of “when will prices come back?” Lampel correctly answered “never,” but I don’t think this is the real question people are asking.

Mr. Lampel treats this issue as one related to the Consumer Price Index (CPI) as a whole. She’s not explicitly talking about the prices of everyday items like food and gasoline that people buy on a regular basis.

This difference is why I’m skeptical. First, the prices of many food items have fallen. Although overall food prices have not fallen, there is a real possibility that food prices will fall further.

Prices for most commodities, such as wheat and corn, are almost back to pre-pandemic levels. Shipping costs have also returned to almost pre-pandemic levels. And companies complain that they are losing some of the pricing power they had during the pandemic.

All this translates to food price inflation falling further (1.6% annualized over the past three months) and potentially turning negative. Although food prices are unlikely to return to pre-pandemic levels, the overall index is likely to decline for a period of time.

When it comes to gasoline prices, we see a different picture. Production cuts by Saudi Arabia (was there a “perfect phone call” from Donald Trump?), oil prices rise from $70 to $90 per barrel, and gasoline prices nationally average near $3.90 per gallon Rose.

However, there is a good chance that these prices will fall again. For better or worse (obviously worse from a climate perspective), U.S. oil production is at an all-time high. Explosive growth in the EV market, especially in China and Europe, will reduce demand. Perhaps Saudi Arabia will respond with further cuts (I don’t have a crystal ball), but it’s not unreasonable to think gas prices will return.

In any case, the important point here is that prices that are most directly relevant to people’s eyes may fall. When you move beyond these prices to items like rent, owner-equivalent rent (the rent you pay yourself to live in a home you own), and buying a new car, do these fit well into most people’s concepts? I don’t know. inflation.

Owner-equivalent rent accounts for more than a quarter of CPI, but two-thirds of households who own their home are actively thinking about how much it costs to rent their place. Most people rarely buy new cars, and even infrequently buy used cars (used car prices have fallen over the past year).?

I also doubt that many people who aren’t economists or people who write about economics have a clear vision of the overall CPI or their chosen price index. Because of this, I don’t think many people expect prices to actually go down. Average hourly wages have increased by almost 20% since the pandemic began, but do people really expect him to pay the same amount for the same thing as in 2019?

It’s also worth noting that prices never went down in the 1980s. Ronald Reagan sang about “Morning in America” ​​during his 1984 re-election campaign, when inflation was still above 4.0 percent.

My guess here is that fears of prices falling again are being stoked by the Fox News gang and their political allies. This is a theme they endlessly promote. I know this because Elon Musk decided that I had to see the tweets of every right-wing politician and pundit in the country on my Twitter feed. (I’ve blocked most of them, but they still show up a lot.)

As is often the case, Fox can have a huge impact on the country’s political agenda. We see this all the time, most obviously with the absurdity surrounding Biden’s impeachment. An extensive months-long investigation yielded no significant evidence and destroyed most of President Biden’s right-wing theories about corruption. But the House is ready to move forward, with nearly half the country saying they believe there are reasonable grounds for impeachment.

Anyway, we know that Fox and his ilk are endlessly bickering about out-of-control inflation. This may not match reality, but for many people it’s not a big factor. In short, I think the question Mr. Lampel is addressing is not whether inflation will turn deflationary, but the question is when, if ever, the right will stop whining about inflation.

The myth of deflation

As far as this topic goes, I would like to dispel one of the myths about the deflation problem. Lampel reiterated the widely circulated narrative that when deflation, like the one Japan experienced in the 1990s and 2000s, consumers delay purchases, leading to reduced demand and a weaker economy. There is.

I don’t think this story makes much sense. Japan’s deflation peaked at an annual rate of about 1.0%, but declines have typically been smaller. Would people really delay buying a $40 shirt or pair of pants just because it might be 20 cents cheaper in six months? Even on a big-ticket item like a $30,000 car, you save $150. Does it make sense to delay the purchase for 6 months?

Also, focusing on the overall index overlooks the fact that when inflation is near zero, prices for many items are already falling. In fact, car prices often fell here even though overall inflation was positive in the decades before the pandemic. If the inflation rate falls from +1.0% to -1.0%, it simply means that the balance of items with declining prices has increased.

There is a plausible story that falling prices have a negative impact on investment. When an automaker is considering building a new factory, the question is how much car sales it expects to generate over the next 10 or 20 years. If the company thinks prices will go down in five or 10 years, it will be less likely to build a factory.

So while deflation is certainly bad news for the economy, it’s just as bad news as 1.0% inflation is worse than 2.0% inflation, and crossing the zero mark means nothing. (You could tell stories of deflationary spirals, but Japan has never seen anything like it, and neither have most others since the Great Depression began.) , deflation can be bad, but only if you have very low inflation as well. Could be bad. Zero doesn’t matter.

This first appeared on Dean Baker’s Beat the Press blog.