For fans of code-breaking, Thursday morning’s Wall Street Journal home page provided plenty of material to perplex and entertain.
There was an article documenting a sharp price decline in memory chips, which are essential parts in cars and smartphones and household appliances. Another about declines in shares of fertilizer companies, driven by “falling crop prices.”
Yet a third article reported a narrowed trade gap, due to a pullback in the American frenzy for foreign goods. There was also a report that rates on 30-year mortgages had fallen sharply, to 5.3% from 5.7% a week ago.
Amid all that, as the Journal observed, the minutes of the Federal Reserve Board’s rate-setting meeting released Wednesday suggested that inflation panic drove its decision to raise rates by three-quarters of a percentage point, the largest increase in 28 years.
What’s wrong with this picture?
Signs are proliferating that the inflation rate peaked in February and March. That hasn’t been too visible in the most recent data releases from the Bureau of Labor Statistics but may become evident with the agency’s next report on the consumer price index, due July 13.
It’s proper to stipulate that as inflation ebbs and prices begin to come down, the cost of many goods and commodities are still materially higher than they were a year ago. That means that the pain of the last few months will linger.
The national average price of gasoline, for instance, has been falling for the better part of a month, to an average $4.75 per gallon for regular, down from $4.92 a month ago, according to the AAA. That will bring some relief to motorists, but a year ago the average price of regular gas was $3.14.
Still, the falling pace of price increases suggests that the Fed, which is fixated on inflation and has a tendency to fight the last war, may be misreading the economic environment.
The minutes released Wednesday, along with subsequent statements by Fed Chairman Jerome Powell and other Fed governors indicate that its determination to control inflation is so firm that it’s willing to risk provoking an economic downturn to achieve its goal.
As we’ve observed before, sacrificing jobs in the cause of reducing inflation is a cure worse than the disease. More to the point, it places the burden of monetary policy on the backs of the wrong people. Rank-and-file workers and their wages have not been the drivers of inflation in the past year. Rather, it’s been driven by structural issues in the post-pandemic global supply chain and by corporate actions designed to fatten profits, which are then funneled to executives and shareholders.
Indeed, the principal inflation remedy in the Fed’s medicine chest — raising interest rates — is ineffective against the most important drivers of inflation today. Nothing about U.S. interest rates will affect the constraints on supplies of computer chips and other goods and parts resulting from COVID-related factory shutdowns in China. Interest rate increases could do nothing to reduce logjams at U.S. ports that kept shipped products from reaching consumers.
Oil prices, which are set in the global marketplace, are affected by the law of supply and demand, but if Powell and company aim to reduce U.S. demand by stifling its economy generally, there will be lots of collateral damage in U.S. households for marginal gain, at best.
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