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4.7% annual rate for the CPI and 3.7% for the PCE. So
the Fed's fight against inflation isn't over.
That headline inflation has dropped more than core
inflation tells you that lower food or energy inflation
played a meaningful role. In this case, it was energy.
As measured in the CPI, energy prices have dropped
11% over the past five months, whereas they rose
27% over the previous seven. And perhaps this
constitutes a third catch. With the war in Ukraine still
raging and Iran in turmoil, maybe we can't count on
gasoline remaining at $3 a gallon.
Was the rest of the stunning drop in inflation in 2022
due to the Fed's interest-rate policy? Driving inflation
down was certainly the central bank's intent. But it
defies credulity to think that interest-rate hikes that
started only in March could have cut inflation
appreciably by July. There is an argument that
monetary policy works faster now than it used to-
but not that fast.
What did change dramatically was the supply
bottlenecks. Major contributors to inflation in 2021
and the first half of 2022, they are now mostly behind.
us.
Peering ahead, the bottlenecks almost certainly won't
return. Another energy shock can't be ruled out but
looks unlikely. And the anti-inflationary effects of the
Fed's monetary policy are yet to come.
Altogether, the inflation future does indeed look
brighter than the inflation past. Happy New Year.
Joseph R. Biden ICYMI: Former Fed Vice Chair in Wall
presidency.ucsb.edu
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