Lately we hear a great deal about inflation and high prices. The price level and inflation rate are related to each other in the same way as are a vehicle’s speed and its acceleration rate. At a constant 70 mph, acceleration rate is zero, but the vehicle is still going 70.
The same applies to the relationship between inflation rate and price level, measured by the Consumer Price Index (CPI). The inflation rate is the CPI’s acceleration rate. However, the analogy breaks down when it comes to slowing. If you take your foot off the accelerator, your acceleration rate is negative, and the car slows down. At least since 1960, except for 2008 (during the financial system meltdown when the inflation rate was briefly – 0.3 percent), the inflation rate has always been positive. So, the CPI constantly increases.
The inflation rate decreased from early 2018 until late 2019, but remained positive. Therefore, though the inflation rate declined, the CPI continued to rise until the onset of the 2020 covid recession.
Covid after-effects hit the economic accelerator again; inflation rose sharply, and the CPI sped up. After peaking at eight percent in mid-2022, inflation has fallen to its present level of 2.5 percent, but the CPI continued rising, just more slowly. The only sustained period of deflation (negative inflation rate) occurred during the Great Depression.
Confusing high prices with high inflation, Donald Trump constantly claims inflation is out of control. That is simply not true.
Mr. Trump confuses high prices and inflation. High prices can coexist with low inflation. In fact, the Fed’s target level for inflation is two percent. We aren’t far off, so close the Fed recently lowered its benchmark interest rate signaling it isn’t worried about inflation. Neither should you be. Of course, prices are still high. Answering the question why so will have to wait for another day.
Since 1979 tHE CPI briefly declined in only two of the most recent six recessions, the only two of twelve post WWII recessions when the CPI declined. Even at the Fed’s two percent target, the CPI will continue to rise, albeit slowly. But prices won’t fall!
From 1970 through 1982 we experienced four recessions, two of them deep and lengthy as recessions go. They were the double-dip oil price shock recessions. Inflation spiked to about 11 percent in 1974, fell briefly, then spiked again to 13.5 percent in 1980.
At the same time, unemployment rose from 3.5 percent in late 1969 to 10.8 percent in 1980. The combination of high inflation and high unemployment caused prevailing macroeconomic models to blow a gasket. They couldn’t handle simultaneously high inflation and high unemployment. Economists had to invent a new term, stagflation. Right now, we are benefiting from the opposite, low and falling inflation at 2.5 percent and low and falling unemployment at 4.1 percent, economic nirvana.
Inflation is considerably more variable than is the CPI. Inflation rises and falls but, we hope, doesn’t become negative. Lower and higher inflation rates only slow down or speed up CPI’s upward march.
If inflation stays around two percent, prices will rise slowly. That is, unless Mr. Trump regains the White House and raises tariffs, cuts off immigration, and conducts mass deportations, as he promises. Keeping those promises, especially raising tariffs, will kick off another round of escalating inflation and prices will fly even higher. His ignorance of economic principles in that case will do real harm.
Patrick Taylor lives in Ridgeland.
