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  • Writer's pictureThe San Juan Daily Star

American optimism comes for the economy

In an undated photo provided by the Bureau of Labor Statistics, a measure of America’s core inflation, excluding shelter, since January 2023. Inflation is yesterday’s problem. In fact, it has been under control for months, Paul Krugman writes. (Bureau of Labor Statistics via The New York Times)

By Paul Krugman

What will happen in November’s election? I have no idea, and neither does anyone else. But I thought it might be worth flagging a development that probably isn’t getting enough notice: Americans seem to be quietly getting more optimistic about the economy.

We’ve come to take it as a given that no amount of good news will change Americans’ negative view of the economy; they were shocked by the inflation of 2021 and 2022, and the story goes, it will be years before they acknowledge that inflation is down and jobs are abundant. But there are at least hints that views may be changing, and faster than many observers realize.

One source of evidence is the New York Fed’s monthly Survey of Consumer Expectations. I usually follow that survey to track expected inflation, which remains fairly subdued. But the survey also asks consumers whether they expect their financial situation to be better or worse a year from now.

There has been a huge improvement not just since the worst of the inflation surge but even since late last year. We’re almost back to the optimism that prevailed in President Joe Biden’s early months, before inflation took off.

Another source of evidence, albeit with less of a track record, is a survey conducted by The Financial Times and the University of Michigan’s Ross School of Business, which asks voters whether Biden or Donald Trump would do a better job of managing the economy. Earlier this year Trump had a double-digit lead; now it’s down to 4 points.

It’s still unlikely that the economy will be a net plus for Biden. But it may be much less of a drag than many expect (especially given falling gas prices). Which in turn means that the election may turn on other issues, like the Republican threat to birth control.

The Federal Reserve Has a Good News Problem

For inflation nerds, Wednesday was a double-whammy day: a new inflation report in the morning, a Federal Reserve interest rate announcement in the afternoon. And there was a weird dissonance between those two data points.

First, that inflation report was extremely encouraging, almost too good to be true. Actually, it probably was too good to be true: monthly numbers are noisy. But while this report was too good to be true, it helped make the case that the discouraging numbers early this year were too bad to be true.

The real story, I’d argue, is that inflation is yesterday’s problem. In fact, it has been under control for months. But that reality has been hard to see, given the noisiness of the data.

Consider core inflation — prices excluding volatile food and energy prices — excluding shelter inflation, which we know is still being driven by rapid rent increases that ended a year or more ago. Nobody thinks prices actually fell last month, but that measure’s negative number highlights how erratic the monthly data is.

We should discount those big numbers early this year, which probably reflected start-of-year price resets rather than underlying inflation. Meanwhile, the annual rate of inflation has been around 2%, the Fed’s target, since last fall. Basically, we’ve been where we want to be for around eight months.

But the Fed — burned by its failure to foresee the inflation spike of 2021 and 2022 — isn’t ready to say that yet. Its economic projections, mostly made before Wednesday morning’s numbers, show only gradual progress against inflation. Of course, it didn’t cut rates (nobody thought it would), and its statement about that decision was only slightly more dovish than the last one.

The rest of us, however, don’t have to be that cautious. Inflation has basically been defeated, and interest rates will be coming down — not today, and maybe not at the next meeting, but soon and for the rest of this year and much of next.

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