Good news has strange effects. After just two months of encouraging US price developments, there is much talk about the death of inflation and the lessons to be learnt.
Financial markets are betting on a soft landing of lower inflation without recession. Economists speak of “immaculate disinflation”. Some go further, projecting US success in beating inflation will apply everywhere. There are even mutterings that inflation was, after all, transitory and that the seemingly painless decline in US CPI inflation should force a fundamental rethink of economic theory. It has been hot in many parts of the world, but people are getting a little overexcited.
Some facts are needed to frame the debate. Falling US CPI inflation from a peak of over 9 per cent to 3.2 per cent in July this year cannot mask the huge overshoot of prices compared with targets. Over the past two years, this headline measure of US inflation has risen 12 per cent — an annual rate roughly three times faster than the 2 per cent the Federal Reserve desires. In the eurozone and the UK the increases over the past two years have been even higher, at 14.6 per cent and 17.6 per cent respectively. At a minimum we have had almost six years of expected inflation in just a couple. Prices are rising slower, but they are not falling back.