The War on Inflation: Victory at What Cost?

For more than a year, the Fed, led by its chair Jerome Powell, has been fighting the worst outbreak of inflation in the United States in 50 years. This slideshow, first presented at the Northport MI Lions Club on July 28, 2023, addresses three questions: 

1. How are we doing?
2. Why is inflation so hard to reverse?
3. When will things get back to normal?

The bottom line: The good news is that inflation is falling faster than we might think from reports in the mass media. The bad news is that things are not yet back to normal. Trying to push the inflation fight too fast could do more harm than good.

View the full slideshow for details.

Corporate Political Responsibility in a Captured Economy

The social responsibility of business has been debated for years. One point of view follows Milton Friedman’s maxim, “In a free society … there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.” Others argue for the priority of ESG values, even if they conflict with profit-making. A more pragmatic perspective sees ESG simply as a set of tools that facilitates risk assessment and enhances long-run profitability. 

The political responsibility of corporations has, unfortunately, received much less attention. Friedman himself alluded to political responsibility when he added the proviso that firms must “stay within the rules of the game” by pursuing profit through “open and free competition without deception or fraud.” Unfortunately, he failed to follow up by asking the critical question: In a free society, who makes the rules?

The rules of the game

There is little controversy about the basic rules of the game for free-market capitalism: respect property rights, compete openly and honestly based on price and quality, and follow common-law principles of fraud, nuisance, and negligence. The hot-button disputes over corporate political responsibility pertain not to the basic rules themselves, but to their application to issues that dominate the daily news, like environmental protection, railroad safety, or workers’ rights.

Supercore Inflation is Worth Watching, but it is Probably Not a Good Policy Target

Although headline inflation continues to fall and unemployment is near a 50-year low, the Federal Reserve still faces some tricky policy decisions over the next few months. Many of these have to do with the unusual volatility of relative prices during the 2021-2022 inflation, a topic that I wrote about in a recent commentary. This piece picks up where that one left off. It focuses on the behavior of the subset of prices that constitute the so-called supercore relative to prices that are more flexible.

Supercore prices have been in the news lately because some observers think the Fed is targeting them. This commentary will argue a focus on supercore inflation may have led to a more-than-prudent degree of monetary policy tightening by late 2022 and early  2023. The fact that high interest rates appear to have been a contributing factor to the banking crisis that was touched off by the failure of Silicon Valley Bank in March only strengthens the case.

So, what is the supercore?

So, what, exactly, is the supercore? The notion of ordinary core prices is familiar enough. The core consumer price index, for example, is the ordinary CPI with the highly volatile prices of food and energy removed. The personal consumption expenditures index, a CPI alternative, also has a core version that removes the same two sectors. Measures of the supercore go further by removing still more items.

Why the Inflation of 2021-22 Did Not Spiral Into Stagflation and Implications for Policy Going Forward

The ominous uptick in consumer prices that began in the spring of 2021 triggered alarm bells. By fall, the future looked dark to many observers.  A market strategist cited by Reuters warned that the surge in inflation would not be transitory, as the Fed and Biden administration were then promising. “Sticky and sustained” inflation when the country was “past peak growth” would constitute “stagflation," he said, reviving a term coined in the 1960s.

Yet there was no stagflation. The 2021-2022 episode turned out to be very different from the economic turmoil that bedeviled the U.S. economy from the 1960s into the early 1980s. Its brevity was one key difference. A second difference was a far greater volatility of relative prices. A third concerned the role of expectations. As this commentary will explain, these three differences, taken together, carry important lessons for policymakers.