Is this inflation episode over?

…definitely!

Looking at how far inflation has fallen and how fast it is falling it is reasonable to assume that the inflation rate could reach the target level of about 2% within three or four months, argues Paul Romer in this commentary. His predictions are based on data from the non-seasonally adjusted CPI-U Less Food and Energy, which he decided to use after the Bureau of Labor statistics changed the seasonal adjustment factors that it applies to the CPI , last February, and used new factors to modify the data. To analyze the speed with which inflation is falling he looks at the most recent CPI-U Less Food and Energy data that includes August 2023, and compares the most recent six-month intervals:

• Most recent 6 months: Price change is 1.13 percentage points smaller than in the same months one year ago.
• Previous 6 months: Price change is 0.74 percentage points smaller than in the same months one year ago.

Yes, this is a time of unusual uncertainty. Yes, something unexpected could happen. Yes, inflation could go back up.
If it does, keep following the facts. Raise rates then when the facts say that you should.

It Would be Crazy to Raise Rates
By: Paul Romer – Boston College

…not so fast!

Mickey Levy, in this WSJ commentary argues that CPI, which measures out-of-pocket household expenses, is 18.9% higher than its pre-pandemic level, and prices of some essentials have risen higher. In addition, businesses face steep operating and borrowing costs to boot. Should the Fed stop raising rates? No, argues Levy especially since the broad reacceleration of GDP growth during the third quarter highlights the need for the Fed to keep a restrictive monetary policy stance. His main concerns center around the following issues:

• The “dysfunctional fiscal policy”, namely the ever increasing deficit, growing debt, and the cumulative effect of the inflation-indexed entitlement programs such as Medicaid, Medicare, Social Security, and others.
• The puzzle in mortgage markets, where tens of millions of homeowners who locked in mortgages at rates below 3% between 2020 and 2021 are now unwilling to sell. As a result, the ensuing shortage of homes has pushed home prices higher and has impaired labor mobility, historically an important factor for production and labor-market efficiencies.

We’re Still Paying for the Federal Reserve’s Blunders
By: Mickey Levy – Hoover Institution