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It is no exaggeration to say that tomorrow's Consumer Price Index release will be the most important in generations. Inflation was both low and uneventful in the years following the financial crisis. The Federal Reserve said it was targeting two percent inflation but undershot that number so consistently that many came to assume that we had entered a period of permanent low inflation.
Inflation volatility was so low that this became a source of criticism of Fed policy. The idea was that extremely low levels of volatility helped bond investors and bond issuers by taking away inflation risk. This allowed a massive accumulation of debt in both the private and public sector, the argument went. As a result, the financial and economic system was supposedly becoming more fragile and debt-dependent.
Others said that the consistently low level of inflation was evidence that the Fed must really be targeting a lower level of inflation than two percent. This was a sort of ultra-monetarist view. It had as its premise the idea that the Fed could control inflation, and so if inflation was running below the official target, the real target must be lower.
What a strange idea. It now seems much more likely that the Fed does not really control inflation in the way that both the central bank or its critics in the era of low inflation imagined. Perhaps it can influence the direction of prices over long periods of time, but the idea that the Fed can hit precise targets seems a bit fanciful in an era when we're running far above the target and the numbers have become unpredictable.
For what it's worth, inflation is expected to run at a 6.7 percent annual rate in tomorrow's report. But the risk is for an upside surprise. Economists have been underestimating monthly inflation for most of the year; and some real-time signs of prices, such as the renewed upward charge of wholesale used car prices, indicate that inflation may have accelerated more than expected.
That certainly seems to be the thinking over at the White House. The Biden administration has spent most of this week attempting to distract attention from inflation. Look at all the jobs that have been "created" (never mind that they've mostly just been reopened)! Unemployment has fallen to almost as low as it was prepandemic! Isn't that jobless claims number grand? The problem for the White House is that Americans now see inflation as the top economic problem facing the nation, and no amount of happy talk about jobs figures is going to make people feel better about their paychecks buying fewer and fewer groceries each month.
– Alex Marlow & John Carney
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