Inflation is about to come down — but don’t get too excited
By Paul Krugman
The inflation report for March came in hot, as expected: Consumer prices are up 8.5% over the past year. But more than two years into the pandemic, we’re still living on COVID time, where things can change very fast — so fast that official data, even about the recent past, can give a misleading picture of what’s happening now.
In this case, the consumer price index — which roughly speaking measures average prices over the month — probably missed a downward turn that began in late March and is accelerating as you read this. Inflation will probably fall significantly over the next few months.
But don’t get too excited. The better numbers we’re about to see won’t mean that the inflation problem is over.
Why expect inflation to come down? Surging gasoline prices accounted for half of March’s price rise, but it now appears that the world oil market overshot in response to Russia’s invasion of Ukraine. A lot of Russian oil is probably still reaching world markets, and President Joe Biden’s million-barrel-a-day release from the Strategic Petroleum Reserve makes up for much of the shortfall. As of Tuesday morning, crude oil prices were barely above their pre-Ukraine level, and the wholesale price of gasoline was down about 60 cents a gallon from its peak last month.
Beyond that, there are growing indications that the bullwhip is about to flick back.
What? The bullwhip effect is a familiar issue for products that are at the end of long supply chains: Changes at the consumer end can lead to greatly exaggerated changes farther up the chain. Suppose, to take a non-random example, that a shift to working from home — then, coronavirus panic — leads to increased purchases of supermarket toilet paper (which is a somewhat different product from the stuff used in offices). Consumers, seeing a shortage, rush to stock up; supermarkets, trying to meet the demand, overorder; distributors who supply the supermarkets overorder even more; and suddenly there are no rolls to be had.
(I presume, by the way, that the term “bullwhip effect” comes from the fact that when Indiana Jones swings his arm, the tip of his whip moves much faster than his wrist.)
Bullwhip effects probably played a significant role in the bottlenecks that have bedeviled the economy since we emerged from the pandemic recession. Consumers, unable or unwilling to consume face-to-face services, bought lots of manufactured goods instead — and, in some cases, overbought out of fear that goods wouldn’t be available. Wholesalers and shippers, in turn, rushed to buy to be able to meet consumer demand; and suddenly, there weren’t enough shipping containers or port capacity, sending costs soaring.
But now there is growing buzz to the effect that the bullwhip is cracking back. The CEO of FreightWaves, a company that specializes in supply-chain analysis, recently published an article titled “Will the bullwhip do the Fed’s job on inflation?” (Actually no, but I’ll get there.) He pointed out that retailers appear to have overbought and are sitting on unusually large inventory. Car lots are filling up; demand for trucking is falling quickly. International shipping rates seem to be coming down.
Supply-chain issues, in other words, may well be about to fade away, producing a glut of trucking and perhaps shipping capacity. And this will remove one reason for high inflation.
OK, there are some other immediate factors pushing in the opposite direction. In particular, the cost of new apartment rentals has soared, a fact not yet fully reflected in official measures of shelter inflation, which still largely reflect leases signed many months ago. Still, it’s likely that over the next few months inflation will come down significantly.
But as I said, don’t get too excited. The U.S. economy still looks overheated. Rising wages are a good thing, but right now they’re rising at an unsustainable pace. This excess wage growth probably won’t recede until the demand for workers falls back into line with the available supply, which probably — I hate to say this — means that we need to see unemployment tick up at least a bit.
The good news is that there’s still no sign that expectations of high inflation are getting entrenched the way there were in, say, 1980. Consumers expect high inflation in the near future, but medium-term expectations haven’t moved much, suggesting that people expect inflation to come down a lot.
Anyway, if you think Tuesday’s report showed inflation spiraling out of control, you’re wrong. In fact, we’re probably about to get some misleadingly good news on that front.