This blog is a summary of an October 13, 2022 discussion on Twitter Spaces. Quotes have been edited for clarity. You can listen to the full conversation on Twitter here.
The Consumer Price Index rose 0.4% in September after only rising 0.1% in August according to the latest release from the Bureau of Labor Statistics, with year-over-year inflation now at 8.2%. On the morning of the release, the Economic Studies program at Brookings convened Hamilton Project Director Wendy Edelberg and the University of Michigan’s Justin Wolfers and Betsey Stevenson to discuss the new data.
You can listen to the full discussion on Twitter here.
(Another) disappointing report
“I think close to 100% of economists around the world who look at this report would be disappointed,” said Wolfers, who said it wasn’t just this report but the trend that it represented that was especially discouraging. “We had the same conversation a month ago, and one month’s bad news could be a blip, but two is starting to feel like a pattern.”
Goods prices stabilizing, but services taking off
“One month’s bad news could be a blip, but two is starting to feel like a pattern.”
Edelberg noted that core goods prices – the CPI for goods minus volatile energy and food prices – were flat for the month, and categories like apparel and appliances saw declines; these same categories have seen a softening of consumer demand, in part because of Fed policies. “If we can get demand down,” she said, “we will indeed see that passed through to lower prices, which means the Fed just has to do more.” But Wolfers and Stevenson noted that the trend of rising service sector inflation remains troubling. “Across the board on average the price of services is rocketing up,” said Stevenson, “And that’s where the Fed is going to have to keep pushing its foot on the break in order to get demand for services down, or Congress is going to have to give us immigration policies to flood the market with workers so that we can keep down wage pressure.”
Why aren’t wages keeping up
Even though costs of services have increased, nominal wage growth is still lagging behind inflation, said Wolfers. According to a traditional Phillips Curve model, he explained, low unemployment drives employees to seek higher wages, which leads business to raise prices, thus spurring inflation. But while we do have low unemployment currently, we aren’t seeing extraordinary wage gains, potentially indicating a disconnect with traditional models. Stevenson offered an example from the food industry: Prices for food at home have increased 13% in the last year, but food away from home (restaurants, bars, etc.) has only gone up 8.5%. So, Stevenson explained, restaurants are “obviously facing higher price prices for the food that they’re purchasing, but not for the people that are serving it. And I don’t know that that’s sustainable because do people keep doing jobs as their real wages decline?”
Recession bound? Still unclear
In addition to loosening immigration rules to ease wage pressures, Stevenson noted that there are fiscal approaches to reducing risk of a recession, namely raising taxes to lower demand, as opposed to cutting government services. “What you don’t want to do is just keep whacking the people that are getting hurt the most by inflation,” she said. “We don’t need austerity. We don’t want to cut spending on the critical safety net.” Wolfers closed the conversation saying that, while these inflation numbers are indeed disappointing, they don’t represent the whole economy. “Today, I feel a little bit more pessimistic that inflation is a little higher and a little more persistent than I would otherwise have thought,” he said. “But we’ve heard a whole lot of recession talk, an amount that I think is quite extraordinary given the underlying reality, which is the economy remains in pretty good shape.”
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