Inflation’s Slowdown Is Less Than Meets the Eye
Although many economists and investors are encouraged by the latest trends, a deeper look makes clear that pressure on consumer prices is still rising.
Inflation is far from defeated.
Photographer: Murtaja Lateef/AFP via Getty Images
Two major economies posted their latest inflation numbers last week. As expected, inflation rates in both the US and UK were lower. Consumer prices in America rose 6.4% in January from a year earlier, down from last year’s peak of 9.1% in June. Price gains in the UK also dropped, from 11.1% in October to 10.1% last month. But although many economists and investors have been encouraged by slower headline inflation, the reality is that inflationary pressures are still rising.
This isn’t just glib aphoristic paradox. Basic math and base effects are such that even if prices of energy and manufactured goods were merely to stay where they are now, the prices of such traded goods on headline inflation will become increasingly negative over the next few months until those base effects have washed through. Tightening monetary policy has very little effect on prices of traded goods.