Seeing inflation at nearly 5% for April was not great. But had it been 2%, that could have been even worse for some Utahns. It is all about the math.
Speaking of math, if you dine out, you have probably felt the increase in restaurant prices. This is in part because overall food prices are up by 20% since the pandemic began. I have certainly felt it. My family went out for a congratulatory lunch a few weeks ago. Our bill was over $50. For ramen. For three people. Our three bowls and drinks plus one appetizer gave me sticker shock.
That is bothersome, but another thing that has been bothering me the past few months has been the discussion around inflation. Yes, inflation has bothered many Utahns. But another thing that has bothered me centers around two main, conflicting types of statements:
“The Fed is trying to tank the economy with its interest rate increases.”
“The government isn’t doing enough to drive down inflation — it is still too high at 4.9%” (or 5.0% in March, 6.0% in February, 6.4% in January, etc.).
About the first statement: I would like to think that the Fed is not trying to tank the economy. Instead, they are looking to “conduct monetary policy toward the achievement of maximum sustainable long-term growth.” As part of that, they are simply trying to slow down inflation, but do not have many tools at their disposal to do it. One tool that they do have is to raise interest rates. This would expectedly raise unemployment levels or at least slow job growth. So far this has not happened. Accordingly, the Fed keeps raising rates to create some balance between inflation and growth.
About the second statement: Sure, 4.9% is too high, but maybe we should be happy that April’s annual rate had not dropped to the “target rate” of 2%.
“Yeah, but 2% is where we want to be, no?”
Yes, that is the target. But no, not for the April annual rate. An annual rate of 2% for April would have meant significant deflation in April — in just one month — to balance out massive inflation from May and June 2022. We would have needed monthly deflation of nearly 0.8% in April to have gotten to an annual inflation of 2%.
Deflation itself is not bad, but deflationary periods can be bad, particularly when they equate to recessions or depressions. And falling off a cliff to 0.8% in just one month could have been a problem, particularly if it persisted.
May and June 2022 are by far the highest two points for inflation out of the last 12 months. If you were to calculate the expected annual interest rate excluding those months, that equals just over 3%. If this trend continues for another two months, we can expect the 4.9% number to drop to just over a relatively healthy 3%.
So yes, inflation is high. And annual inflation numbers are stubbornly sticky. But hang in there. Give it just two more months. On July 12, we will see June’s annual inflation numbers. We will have shaken off those historically high 2022 monthly rates in May (+0.9%) and June (+1.2%). If I am wrong and we are still near 5% annual inflation by June, that could be a problem (since that would mean that those months will have surpassed the historically high 2022 months). More likely, however, we will be just over 3%. That will be a far cry from the 9% that we saw for the 12 months ending June 2022.
The Federal Reserve Board members are experts in their fields, and they are trying to make some tough balancing decisions to maintain long-term growth. Sometimes that involves some tradeoffs we wish did not exist — such as pushing up unemployment rates to help lower inflation rates.
In the meantime, I hope that the increased cost of ramen will not have permanently scared me away from the occasional decadent family lunch.
Shawn Teigen is the president of the Utah Foundation, a nonprofit, nonpartisan public policy research organization. Reach him at [email protected].View Article