There are a lot of other factors that should dampen inflation that are not yet reflected in government reports. Official housing cost estimates often lag far behind quoted rents, so they are only now absorbing the big increase in 2021 and will not reflect moderating rents for a while. Postage costs have declined, and overall supply chain problems appear to be easing.
So we should get inflation relief in the short term, more or less now. And there are two main reasons to expect the upcoming inflation slowdown to continue.
First, while we continue to hear ominous warnings about a wage-price spiral, that’s hard to manage if, well, wages refuse to rise. And the growth rate of average wages is actually to slow down, from about 6 percent at the beginning of this year to about 4 percent now. That’s still a little too high to be in line with the Fed’s target of 2 percent inflation, but not much.
Second, as the Fed tries to fight inflation by raising interest rates, we shouldn’t expect this effort to pay off much, if at all, at this point. Long-term interest rates, which are important for the real economy and reflect both current Fed policies and expectations about future policies, really took off when March. And no one, absolutely no one, could have believed that this rate hike would have a noticeable effect on inflation in just three to four months.
That is, if the Fed’s policy change will bring inflation down, it will all happen in the future. The markets think the Fed will contain inflation, and so do I; but the June consumer price report somehow says nothing about whether we’re right. It’s just too fast.
So the message we’re getting from the markets – a message backed up by a lot of data that hasn’t hit official consumer price figures yet – is: do not panic. However, inflation has not gotten out of hand the pain many consumers feel at the moment is.