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Given how the U.S. economy could still face some major ups and downs in the next few months, largely because no one really knows what will happen with the CCP Virus and the responses from government, business, and consumers, only an idiot would confidently declare that this morning’s official report shows that the recent inflation burst is over. 

So even though I’ve been in that inflation-is-transitory camp – and therefore, that price trends haven’t yet provided the government to use its taxing, spending, and monetary policy tools to slow the economy’s expansion – I’ll just note how the inflation situation has changed in recent months.

What matters most is that the monthly inflation rate has come way down since June. During the first half of this year, the sequential pace of all price increases sped up from 0.3 percen to 0.9 percent. July’s result was down to 0.5 percent and the August figure just released by the Labor Department was just 0.3 percent – right back where it was in January, when the virus’ last powerful winter wave was cresting.

Also important: The so-called core inflation rate (this measure strips out food and energy prices, supposedly because they can be volatile for reasons having nothing to do with the level of overall national economic activity, and how fundamentally inflation-prone it is) has lost major momentum, too. Between January and June the monthly rise in prices increased from 0.1 percent to 0.9 percent . Since then, it fell to 0.3 percent in July and back to 0.1 percent last month.

Inflation pessimists can still point to year-on-year inflation rates that remain elevated by historic standards (5.3 percent for the total measure and four percent for the core). But the statistical curve is bending in the right direction on these two counts also, and as I’ve written previously, the annual numbers are still distorted – and therefore rendered useless – by the unusually weak inflation reads generated by last year’s short but steep virus-induced recession.

Further, that slowing monthly momentum counts for a lot because the biggest fear surrounding inflation is that it could feed on itself and spiral out of control, as higher and higher prices convince all sorts of customers for goods and services that prices will only keep increasing. As a result, they can fuel further inflation by stepping up purchases and pushing prices still higher (because greater demand for anything, all else equal, will enable producers and providers to charge more). Weaker monthly inflation figures indicate that these pressures have been easing lately.

Focusing singlemindedly on the core carries risks, though. Principally, food and energy prices may well belong in their own analytical category when it comes to measuring inflation. But when it comes to living life day-to-day, it’s another story altogether – since it’s hard to imagine living without them. So price trends could still be hammering consumers and businesses, and in turn the broader economy, even though the core inflation rate is signaling that all’s well.

Just as important, food and energy costs are so important that, if they last long enough, they could feed persistent inflationary fires throughout that broader economy.   

Another potential reason to check inflation optimism: The Labor Department also reported today that price-adjusted hourly wages climbed month-to-month by 0.4 percent. That’s the first positive monthly number since December’s 0.8 percent. A single data point proves little, especially in the pandemic era, but if wages begin advancing faster than overall price increases, many businesses will try to respond to these higher costs by hiking their prices – potentially adding new momentum to inflation.

The consistent drop in inflation-adjusted wages, however, between January and July shows that nothing of the kind had been happening, even though most businesses seem to keep complaining about labor shortages (which should be forcing wages – the price workers can command for their services – up strongly).

Moreover, as I’ve repeatedly pointed out, historically, American employers overall have responded to perceived or actual labor shortages by boosting their productivity – that is, using new technologies (like labor-saving equipment or software) or better management, or both, to improve efficiency and better enable themselves to absorb higher prices rather than pass them on to customers.

This scenario may sound bad for workers, and for some over various periods of time it will be. But to me, anyway, the clear lesson of history is that higher productivity does indeed, as the economic conventional wisdom holds, raise living standards (including wages) in general over time by (a) fostering the emergence of wholly new industries (which invariably need new workers); and (b) boosting existing industries’ ability to turn out more goods and services (which invariably creates the need for new workers, too).

At the same time, clearly not all businesses will take this tack. In fact, many are trying to keep wages low for many employees by agitating for more mass immigration. So far, this lobbying hasn’t succeeded, but it’s still way too early to say that workers have now regained enough bargaining leverage to ensure that their after-inflation pay continues rising robustly.

Wage increases (which I believe are long overdue) may also come to an end, or slow significantly, if weaker recent inflation stems from weaker economic growth – which would be bad for just about everyone. Unfortunately, the last monthly jobs report (also for August) and two important growth forecast series indicate that that’s precisely the case. (See here and here.)

But let’s close on a highly revealing note: One of the sources of these forecasts, the Federal Reserve Bank of New York, has just decided to suspend releasing these projections until it can figure out how to adequately take into account “The uncertainty around the pandemic and the consequent volatility in the data….” If this august institution, with its legions of Ph.D. economists, is telling us that assessing the economy’s direction and fundamental health is currently a mug’s game, that seems like a pretty good reason for caution in interpreting the new inflation report, too.