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Inflation Is Dwindling (Just Like I Said It Was)

There’s even a growing possibility we can avoid a recession.

Chip Somodevilla/Getty Images
Federal Reserve Board Chairman Jerome Powell

If you voted Republican on Tuesday because you thought inflation was raging out of control, you should know that the latest consumer price index, or CPI, figures, released Thursday morning, show that in October inflation rose by the smallest 12-month increment since January 2022. Prices were up 7.7 percent compared to October 2021, down from the September figure of 8.2 percent. Even the dread “core” inflation rate, which disregards volatile gas and food prices, fell a little bit, to 6.3 percent, from 6.6 percent.

“This is a very encouraging inflation report,” tweeted University of Michigan economist Justin Wolfers. “There’s a good chance that inflation has peaked, and is now turning down.”

Actually, inflation peaked five months ago: October was the fourth consecutive month during which the overall inflation rate fell. What’s new, and what Wolfers was referring to, is the dip in the core inflation rate. Between June and September, core inflation rose from 5.9 percent to the aforementioned 6.6 percent, and that was bad. Now it’s going down, and that’s good. The Fed’s preferred measure, the personal consumption expenditures, or PCE, price index, showed a much milder core-inflation increase between June and September than the CPI—0.1 percentage point—which perhaps deserved more attention than it got. We don’t yet know what happened to the PCE index in October, but probably, like the CPI, it went down.

A week ago I wrote that ordinary Americans were worrying more about inflation than the Federal Reserve was, and that this struck me as excessive. But did they listen? Enough, perhaps, to avoid the predicted “red wave,” a metaphor that evokes the blood-filled elevator in Stanley Kubrick’s The Shining. (REDЯUM!) But not enough, in all likelihood, to keep the House of Representatives Democratic.

According to network exit polls, inflation was the issue of most concern to midterm voters (31 percent), followed by abortion (27 percent), crime and gun policy (both 11 percent), and immigration (10 percent). Nearly three-quarters of the voters who put inflation first voted Republican.

Fifty-four percent of voters said they trusted Republicans more than Democrats to tackle inflation, even though the Republican answer to inflation, like the Republican answer to everything else, is to cut taxes—which would increase rather than reduce inflation. Of that 54 percent, a shocking 9 percent were people who voted Democratic! This might be a good moment to remind everybody that Paul Volcker, the Fed chairman widely celebrated for ending the Great Inflation of the 1970s by bringing on what was at that time the worst recession since the Great Depression, was a Democratic appointee. As I’ve written before, the economy consistently runs better under Democratic presidents, and that includes lower inflation.

When I say the Fed isn’t worrying about inflation as much as the general public, I don’t mean to suggest that it isn’t worrying at all. It will continue raising interest rates. But it’s more or less said it’s done, at least for now, raising interest rates by three-quarters of a point, as it did in May, July, September, and earlier this month. Fed Chairman Jerome Powell says he’s still very concerned about tightness in the labor market. But as Elise Gould of the Economic Policy Institute noted after last week’s jobs report, nominal wage growth has been decelerating for most of 2022.

The danger of recession is starting to eclipse the danger of continued inflation. Wolfers notes that the Russia energy shock is mostly over; that inflation in goods is falling as supply chains right themselves; that wage moderation is keeping inflation in services in check; and that rents, a big inflation driver, are finally moderating. “My guess,” Wolfers writes, “is that—if other shocks don’t intervene—we’ll end up concluding in a couple of years that inflation was in fact transitory, but that the word transitory means ‘twice as long as you thought the word transitory meant.’”

Paul Krugman, the New York Times columnist and Nobel laureate in economics, goes further, to suggest we may not have any recession at all. “A soft landing,” he tweeted, “is looking increasingly plausible.” That doesn’t make it likely, and it isn’t certain Powell and the Fed will cooperate to make it happen. But President Joe Biden’s stewardship of the economy, which was excellent before Election Day, looks better still two days later. I wish more voters had understood that, but at least the elevator is blood-free.