The New York Times, and therefore other new media, led today by reporting that June prices were only 3% above last June. President Joe Biden immediately took credit in the name of Bidenomics, his pet coinage.
But the report doesn't really mean much. True, comparing to last June does control for the season, which helps. For example, fuel and airfare prices are usually higher in the summer, because that’s when people travel. So you don't want to compare June to May to conclude that prices are rising in general. You should compare June to the previous June, because travel was popular in both months. That’s a “year-on-year” or “year-over-year” figure.
But this isn't much information, either. It's just one month. And it's probably wrong, because of errors in gathering and computing statistics that the Bureau of Labor Statistics needs several months to correct, in updates that the news media rarely notice. It's safer to look at the year-on-year figures over several months.
The two figures below, from the US Bureau of Labor Statistics, shed light. The first graph shows the rate of change in consumer prices. This is inflation. The second graph shows the rate of change in wages. When prices rise faster than wages, the paycheck buys less. This is a fall in the real wage, which just means wages adjusted for inflation. When wages rise faster than prices, the real wage increases. By comparing the two graphs, you can infer what's happening to the wage's ability to buy.
The real story
As you can see, inflation halved in a year. This is good news but it's thanks to the Fed's high interest rates—not to Bidenomics. In fact, Biden’s deficit share of GDP is still unusually high. In other words, government borrowing still claims a large share of the economy. The borrowing forces up prices, because the government competes with firms and households for products made by scarce workers, machines, and buildings. This is not all Biden’s fault, because he inherited Trump’s tax cut, and because Congress cuts the checks. But neither can Biden claim to be Mister Fiscal Prudence.
But back to trends. The usual story in the news media is that real wages fell during the pandemic because nobody was buying—and rose after the pandemic, when relieved consumers splurged. What actually happened was the reverse, and it illustrates the media’s (read: The New York Times’s) perpetual confusion of prices with wages.
Look at the first graph below. Prices fell early in the pandemic. So real wages rose. In other words, labor became more expensive during the pandemic, because the shutdowns had made it hard for people to find jobs.
After the pandemic, when prices rose again, real wages fell. Labor was becoming cheaper as more people returned to work. But for several months now, real wages have risen, because the labor market has tightened. Workers are in demand, so they negotiate higher wages. This raises production costs, so firms will have to raise prices someday. In short, we haven’t yet whipped inflation.
Biden forgot to mention that people still expect prices to rise. So they will buy now, when prices are still relatively low. That by itself will push up prices. It's a self-fulfilling prophecy. And it's another reason to keep worrying about inflation.
The problem for the Fed is to keep lowering the public’s expectations of inflation, by keeping interest rates a little high. Annual inflation is roughly 4%, and the Fed would prefer 2%, for arbitrary but good-enough reasons. Basically, the Fed picked 2% out of a small hat, but it’s as good a target as any.
A last note: Yes, Biden cherry-picks numbers. But former President Donald Trump makes up the cherries. When are newscasters going to correct them? – Leon Taylor, Baltimore, tayloralmaty@gmail.com
Consumer price index
(urban)
Average hourly earnings, seasonally adjusted
Reference
Inflation Drops to 3% in June - The New York Times (nytimes.com)
No comments:
Post a Comment