The latest inflation figures, released on Friday, showed a month-long decline in prices. Inflation hawks like Jason Furman insist that a good month does not reverse a trend and are urging the Fed to impose another three-quarter point rate hike at its next meeting in September.
Above-normal inflation is not over. But the slowing rate of inflation disproves the hawks’ strongest argument, that inflation becomes “embedded” in the economy and therefore feeds on itself via expectations. And an international comparison, courtesy of EPI, shows that the US core inflation rate over the past two years is below the OECD average.
Those who would crush the recovery to fight inflation tend to be macroeconomists. They look at aggregate demand in the economy and don’t bother to look at micro-trends on the supply side. If they did, they would find confirmation that most of the causes of inflation are supply shocks.
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The other day, The New York Times published an insightful piece in which reporters sat down with the owner of an upscale restaurant in Charlotte, North Carolina called Good Food on Montford and looked at every cost element that was driving him to raise prices from its menu. With the exception of labor costs, which increased for the restaurant by approximately 25% compared to 2019, virtually all other menu increases can be attributed to supply chain issues or abusive pricing in the context of a scarce supply.
For example, wholesale prices for meat in restaurants are very high (56% for steak, 50% for pork), but much of this is due to price gouging by suppliers in a increasingly concentrated industry. There is also a shortage of truckers, reflecting political failures in regulating trucking. It’s unclear how engineering a recession with interest rate hikes would cause more truckers to materialize.
Most of the other foodservice cost increases can be directly attributed to international supply chain factors and the Russian invasion of Ukraine. Global shortages translate into domestic price pressures. The restaurant’s utility bills are on the rise, reflecting rising global energy prices. The cost of its new refrigerators, heavily dependent on imports, rose 80% three years ago.
None of this would be improved by stifling recovery. As for higher labor costs, the fact that Good Food now pays a line cook $16 per hour, up from $12 per hour in 2019, partly reflects the Charlotte’s tight labor market. But these wage increases are lagging behind the cost of living, not ahead.
Nor is it true that increased consumer demand, in the form of increased restaurant dining, is driving these higher meal costs. On the contrary, the higher prices are all a function of the restaurant’s rising costs and scare away the customers.
It would be good if conservative macroeconomists got out of the office and took a hard look at the real economy.