Inflation is falling again with national gas prices below $4 per gallon while food prices are also beginning to decline.
The NY Times’ Paul Krugman just pointed out that food prices should continue to decline per the UN’s Food and Agricultural Index.
“The FAO Food Price Index* (FFPI) averaged 140.9 points in July 2022, down 13.3 points (8.6 percent) from June,” said the FAO, “marking the fourth consecutive monthly decline. Nevertheless, it remained 16.4 points (13.1 percent) above its value in the corresponding month last year. The July decline was the steepest monthly fall in the value of the index since October 2008, led by significant drops in vegetable oil and cereal indices, while those of sugar, dairy and meat also fell but to a lesser extent.”
Therefore, the Fed should not be focusing on bringing it back to a 2 percent inflation rate with more draconian rate increases that have only prevailed since the Great Recession and busted housing bubble.
The above FRED graph dating from 1950 shows both the annual consumer price index at 8.5 percent and ‘sticky’ CPI price without food and energy at 5.6 percent in July, down slightly from June.
During our most prosperous times since 1980 it ranged between 2.5 to 5 percent, per the above FRED graph. That’s because profits rose in tandem with rising prices, thus encouraging businesses to hire more workers and expand further.
Since 1980 we have never had a prolonged supply problem, in other words, with retail inflation trending down ever since—until the current post-pandemic era of a Ukraine-Russia war and recovering supply chains, that is.
Why? Because there was never a shortage of supply due to modern technology’s ability to increase productivity that could flood markets with goods and services. Asia with China could produce things more quickly and cheaply that US.
Yes, all that money now raised from the government aid coursing through the economy is causing a temporary inflation problem, but much of it will be invested in future growth—like the infrastructure and inflation reduction act bills just passed.
President Biden’s $1.2 trillion infrastructure bill includes funding allocations of $89.9 billion to improve public transit, $65 billion toward better internet connectivity and access, and money for 500,000 electric vehicle charging stations, which could help address charging “deserts;” areas where it isn’t currently available.
“The infrastructure bill widely focuses on improving passenger and freight transportation, for instance, so steel and material suppliers, including companies that produce materials for buses, trains, bridges, rail, or related equipment, could see heavy activity. Makers of products supporting things like 5G infrastructure and EV stations, too, will see improved demand,” said a Forbes Magazine article on its effects.
And while there will be little inflation reduction in The Inflation Reduction Act bill just passed, the White House says the package will address inflation in two key ways: by lowering energy and health care costs for families and by helping to bring down the deficit.
"And that's why even Democrats and Republicans, former Treasury secretaries, economists across the board have said that this bill will make a positive impact on inflation while also tackling some of the biggest and long-standing issues facing our country, like prescription drugs and like tackling climate change," said Brian Deese, director of the National Economic Council, in an interview this week with NPR's Morning Edition.
As important in bringing down oil prices is that oil and gas drilling is at a 7-year high. U.S. crude oil prices have dipped below $90 per barrel of late, and who knows how much lower oil prices may decline as more alternative energy sources financed by those two bills come on line to replace the need for fossil fuels?
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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