Kuttner on TAP: The Fed Is a One-Trick Pony

Will the Federal Reserve needlessly push the economy into recession once again? A sloppy reading of the topline in today’s inflation data for June will give hawkish central bankers plenty of ammunition for another large hike in interest rates.

But the 9.1 percent June annual rate of increase in the Consumer Price Index misstates what’s actually going on. Two of the main drivers of inflation are energy and food. The gasoline price index rose 11.2 percent for June. But costs of both food and energy began decelerating in the last week in June and the first two weeks in July—gas prices are well down from their peak—and the June CPI report doesn’t pick up those declines.

Meanwhile, wage growth continues to lag well behind price increases. According to the Bureau of Labor Statistics, real (inflation-adjusted) weekly wages declined by 4.4 percent between June 2021 and June 2022. So wages are obviously not driving inflation. As economist Dean Baker puts it, “It is impossible to have a wage-price spiral when wage growth is slowing.”

The real inflation story continues to be supply chain bottlenecks plus price-gouging by industries with monopoly pricing power. Federal Reserve policies can do little about either, and other policies of the Biden administration are gradually improving both.

Last Friday’s jobs report by the Bureau of Labor Statistics, which got less attention than today’s release on prices, is a better indicator of what’s really going on in the economy. The economy created 372,000 new jobs. Private-sector employment is now above pre-pandemic levels.

The annualized rate of nominal wage increases, at 4.3 percent, is less than a percentage point above the 3.4 percent increase in 2019, when there were no price pressures and inflation was well below the Fed’s 2 percent target.

The unemployment rate stayed at 3.6 percent for the fourth consecutive month. Basically, the recovery is doing just about what you’d want it to do, and wage pressures are not responsible for price increases. But the Fed seems determined to use rate hikes to induce a recession. As the one dissenter from the interest rate policy of the Federal Open Market Committee, Esther George of the Kansas City Fed Bank, put it in a recent speech, “Such projections suggest to me that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust.”

Fed policy has a bad and chronic habit of lagging reality. We must hope that as price increases continue to decelerate, the Fed will come to its senses before it inflicts further needless damage.