Inflation: The Big Misunderstanding

Inflation sours Americans about the economy — and President Biden. A January 14 Associated Press article by reporter Josh Boak examined this in depth. But failed to even mention a crucial point.

It does credit Biden with considerable success in curbing inflation — without sacrificing jobs — a neat trick, really, that many economists thought impossible. Boak notes that Covid-related supply chain gum-ups were a big cause of the inflation bout, and Biden tackled that forcefully, accounting for about 80% of the inflation abatement since 2022.

It has fallen nearly to the Federal Reserve’s 2% target, while we’ve added about 5 million jobs under Biden, with a 3.7% unemployment rate, around historic lows. Gas prices have come down a lot. Eggs were a focus of inflation ire, and their average price has fallen from a peak of $4.82 per dozen to just $2.51.

But, as Boak notes, it was $1.47 before Biden took office. And average prices across the economy certainly remain higher. Which brings me to the key point Boak omitted. The persistence of those higher prices makes people feel the problem isn’t solved. They want prices back down to their old levels.

Reflecting a fundamental misconception, confusing inflation rates and price levels. Reducing the inflation rate does not mean lower prices. It just means they rise more slowly. Reducing prices themselves is an unrealistic expectation.

And would actually be catastrophic. That’s deflation, which is an economy killer. Because it inhibits consumer spending — expecting prices to fall further, people postpone purchases. And deflation is much harder for economic policy to cure. Japan was a poster boy for this, suffering a long chronic deflation and consequently low growth, that its central bank struggled to overcome.

This in fact is why our Federal Reserve targets 2% inflation. Just minimal inflation, to guard against slipping into the slough of deflation. A careful balancing act.

Typically, Trump — with abysmal understanding of economics — is promising to bring prices down. “Gasoline will be back to $2,” or even lower, he says. In other words, he’s promising deflation. Yikes! But fortunately, it’s just bullshit, like everything coming from his mouth.

Boak’s article notes that gas did fall below $2 during Trump’s presidency. Early in 2020, when the pandemic crushed our economy, throwing millions out of work, and reducing demand for gas. (Trump’s idiotic mismanagement of the pandemic was responsible for its severity here compared to other countries.) Is that the halcyon time he’s promising to bring back — to make America great again??