The US inflation rate rose and now has fallen. How close is the US economy to completing the round trip? For thinking about this question, here are a few useful figures from the posts at the blog of the Council of Economic Advisers.

(For those unfamiliar with the CEA, it’s administratively part of the White House. It has about three dozen employees. The three “members” who are in charge are appointed by the president and confirmed by the Senate. However, the members are mostly from academia and/or think tanks–and they will usually go back to their home institution after a few years. Thus, the members are both political partisans, but also have reason to care about not going too far in a way that would risk their credibility upon their return to their home institution.)

This graph is from a post called “Apples to Äpfel: Recent Inflation Trends in the G7″ (June 27, 2023). The statisticians for different governments measure inflation in slightly different ways in every country (for example, in how they measure the costs of rental and owner-occupied housing). The Harmonized Index of Consumer Prices uses a common measure that is directly comparable across countries.

As the figure illustrates, inflation rose in these major economies, but rose first in the United States. Inflation seems to have topped out or started declining in the major economies, but the fall started sooner in the United States. (For an updated analysis from some Fed economists, see here.) Why might this be so?

One hint is in a figure from a speech by CEA Chair Jared Bernstein (“Inflation’s (Almost) Roundtrip: What happened, how people experienced it, and what have we learned?” July 30, 2024). The trigger for inflation, as Bernstein emphasizes, is a rise in demand, resulting in substantial part from fiscal stimulus programs during the pandemic, at a time when supply was constrained, both by kinks in global supply chains and by economic activities restricted during the pandemic. Supply chain disruptions like higher energy prices after Russia’s invasion of Ukraine also played a role.

On the horizontal axis, this figure show the cumulative discretionary fiscal boost since just before the pandemic hit at the end of 2019 up to the beginning of 2024. The cumulative boost for the US is much higher than in other countries. Not coincidentally, the US has also had higher real growth of GDP over this time–as well as starting its inflationary process a little sooner than other major economies.

Bernstein argues that the decline in inflation is essentially the supply constraints from the pandemic unwinding. At least in this speech, he does not mention any role played by the Federal Reserve in the timing or speed of the decline in inflation, which showed by its willingness to raise interest rates that it did not intend to allow the surge of inflation to become entrenched.

However, economists and actual humans tend to see a decline in inflation rather differently, a point that Bernstein makes with different phraseology. When inflation falls back toward the 2% goal set by the Federal Reserve, economists have a “mission accomplished” feeling. However, actual humans are aware that prices are higher than they were before, and that their pay may not have kept up, so they remain discontented.

This figure is from a recent CEA post on the “July 2024 CPI Report” (August 14, 2024). It shows how inflation spiked higher than the growth of wages back in late 2021 though early 2023, but for more than a year since then, average wages have been growing faster than consumer price inflation. This is generally good news, since it means that workers are recovering their lost purchasing power, but it is the kind of good news that is unlikely to generate much rejoicing, because “what you lost is being returned to you, slowly” is not much of a celebratory slogan.

I claim no expertise in forecasting the future; indeed, my usual feeling is that I only understand the economy after about a 2-3 year lag time, as evidence clarifies itself. But for the record, the Federal Reserve focuses on a particular measure of inflation based on “personal consumption expenditures,” and it looks at the “core” measure of PCE inflation that leaves out the volatile movements of energy and food prices. Here’s how it looks:

As you can see, the overall rate of this benchmark measure of inflation is declining, but the 12-month average has not yet reached the 2% goal. The Federal Reserve has communicated quite strongly over the last year or two that it intends to keep interest rates relatively high, compared to the last decade or so, to reach the 2% goal. Also, central banks in general very much like to have the credibility that comes from keeping their promises. Bernstein says in his July 30 speech that “inflation’s round trip is not yet complete,” and I suspect the Fed feels the same.

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